Getting motor fuel taxes right : An empirical application on Sweden

Sammanfattning: I estimate optimal passenger car fuel taxes for Sweden while accounting for negative externalities such as congestion, accidents, CO2 emissions, particle pollution, road reinvestment need, winter road maintenance need and noise. By allowing for tax interaction effects with the broader fiscal system the fuel tax substitutes for the tax on labour income, consequently the optimal fuel tax may deviate from fuel tax level proposed by the Pigouivan principle. Results suggest that the diesel tax should be increased by 0.74 SEK/litre from its current level. The tax on petrol on the other hand should be lowered by 1.47 SEK/litre. A sensitivity test where all externality values were varied simultaneous +/- 50% of their benchmark values suggests a diesel (petrol) tax at 5.83 (5.07) SEK/litre in the low value scenario and 12.78 (10.31) 10.31 SEK/litre in the high value scenario. Furthermore, this study indicates optimal tax rates to be the most sensitive toward changes in the own price elasticity of demand for fuels.