The Gasoline Climate Trap

Abstract

Due to taxes and subsidies, gasoline prices vary dramatically across countries. Externalities cannot fully explain differences in gasoline taxes. We develop a simple political-economic model that shows that group interests, resulting from the composition of a country's car fleet, help to explain differences in gasoline taxes even among countries with identical fundamentals. In the model, citizens' car ownership is endogenous. The model has two equilibria: a low-tax equilibrium, in which a majority of citizens own a big car, and a high-tax equilibrium, in which a majority of citizens own a small or no car. Though distributional motives help to explain gasoline taxes, these taxes are not necessarily progressive. Our model demonstrates the possibility of a society in a climate trap where a low gasoline tax reflects the views of a majority, but another majority would benefit from an equilibrium with a high gasoline tax.