00074918.2013.850641

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Bulletin of Indonesian Economic Studies

ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20

Fuel Taxes and the Poor: The Distributional Effects

of Gasoline Taxation and Their Implications for

Climate Policy

Elisheba Spiller & Gernot Wagner

To cite this article: Elisheba Spiller & Gernot Wagner (2013) Fuel Taxes and the Poor: The Distributional Effects of Gasoline Taxation and Their Implications for Climate Policy, Bulletin of Indonesian Economic Studies, 49:3, 392-393, DOI: 10.1080/00074918.2013.850641

To link to this article: http://dx.doi.org/10.1080/00074918.2013.850641

Published online: 05 Dec 2013.

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392 Book reviews

approach to regional policy. Garnaut argues that this approach now applies not only to trade negotiations but also to those on climate change, for example, which

Frank Jotzo (chapter 6) believes Indonesia has the potential to inluence. Jotzo

provides as evidence Indonesia’s unilateral commitment at the G20 Summit to reduce greenhouse-gas emissions; but he cautions that ‘pledges do not equal action’ (p. 94), because Indonesia has many entrenched interests at home. Moreo-ver, he argues that in international climate negotiations Indonesia’s size is less than its weight – relative to countries like Brazil, South Africa, India and China, which have a much greater institutional capacity and a history of strong engage-ment – and that the governengage-ment must provide incentive structures or effective regulatory instruments to bring Indonesia’s local and national objectives into line. Perhaps the most central concern for Indonesia’s development comes in chap-ter 8, in which Scott Guggenheim argues that Indonesia’s knowledge sector must

lourish if it is to support most, if not all, of the reforms needed to sustain the

country’s rise. Fixing Indonesia’s weak knowledge institutions, Guggenheim asserts, involves not just improving the supply side but also addressing the lack of demand for policy-oriented knowledge.

Although this book covers many matters related to Indonesia’s latest, policy-led rise, it does not address problems of micro-level implementation (such as the local delivery of public goods and services) or other internal or external

hin-drances to Indonesia’s development. Nor does it offer a suficient geographical

and historical analysis. The trading network and maritime prowess of the great

empires of Sriwijaya and Majapahit relect Indonesia’s potential as a global trader

and the world’s greatest maritime nation. Yet Indonesia’s strength here seems to be fading, evidenced by its poor ocean connectivity and logistics, weak maritime

security, uncompetitive shipping and isheries industries, and obsolete marine

technology. The book is rather muted in saying that Indonesia has almost lost its

maritime identity, but without it rediscovering this identity it is dificult to envi -sion the country as an Asian giant.

Maria Monica Wihardja

Jakarta

Thomas Sterner (ed.) (2011) Fuel Taxes and the Poor: The Distributional Effects of Gasoline Taxation and Their Implications for Climate Policy, Environment for

Development Series, RFF Press, Abingdon, pp. xix + 357. Cloth: £60.00.

The low real price of gasoline has helped fuel our ability to drive cheaply for the past century, although it has also contributed to climate change, pollution, congestion, and national-security concerns. Economists have long argued that taxes on gasoline and diesel can help decrease fuel consumption, stimulate the search for less polluting fuels and the vehicles that use them, and generate adap-tive behaviour that could reduce accidents and congestion associated with too much driving. However, opponents to taxation have often claimed that this adap-tive behaviour is less available to the poor, who end up bearing the burden of

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Book reviews 393

increased fuel taxes. The cry of fuel-tax regressivity has not only given fodder to those who would like to avoid fuel taxes but has also contributed to the persistent use of large fuel subsidies worldwide.

Thomas Sterner’s edited collection Fuel Taxes and the Poor shows that those claiming that fuel taxes are regressive are largely wrong. And even where an ini-tial fuel tax is, in fact, regressive – as is likely the case in the US – simple adjust-ments in other taxes can help offset its regressiveness. In chapter 3, for example, Antonio M. Bento and his co-authors demonstrate that the high level of tax bur-dens on the poor can be mitigated through income-based recycling of the tax’s revenue. The authors in chapter 4 propose a different type of regressivity mitiga-tion, in which labour taxes are reduced by the amount of revenue raised by fuel taxes. This sort of tax swapping lends credence to the double-dividend argument promoted by environmental economists, though the authors do not attempt to measure the subsequent increases in the price of other goods (which is the main argument of why a double dividend may not be readily available, after all).

These secondary effects from fuel taxes (such as increased food prices, increased

public transport prices and changes in wages) are dificult to measure in a partial

equilibrium analysis, on which almost all of the chapters in the book rely. The one exception to this is in chapter 9, where Arief Anshory Yusuf and Budy P. Resosu-darmo analyse the fuel-tax burden in Indonesia through a general equilibrium technique. They use the INDONESIA-E3 model, which allows for an economy-wide analysis of 38 industries and 43 commodities. The results show the economy- wide-ranging impacts of an 87.5% increase in gasoline prices and a 104.7% increase in diesel prices, as implemented by the Indonesian government in 2005. These large (and non-marginal) increases in fuel prices, which can be validly analysed

only through a computable general equilibrium (CGE) model, result in signiicant

decreases in GDP, employment and consumption, although the welfare distribu-tion is robustly progressive. The use of a CGE model in this chapter is refreshing, although the analysis falls short: given that these price increases did, in fact, occur, the authors could have compared their predictions with the outcomes in Indone-sia in 2005.

Sterner’s book makes a strong case that arguments of fuel-tax regressivity

are lawed: in most countries, fuel is a luxurious good, consumed largely by the rich. Thus, fuel subsidies are generally regressive, beneiting the rich, whereas

fuel taxes can help minimise income inequalities. Though Sterner’s meta-analysis shows that tax progressivity decreases with a country’s median income, the book demonstrates that, in richer countries, the general regressivity of the tax can be alleviated through revenue recycling or tax swapping. This compilation makes it

more dificult to argue against fuel taxes; policymakers should take note.

Elisheba Spiller

Environmental Defense Fund

Gernot Wagner

Environmental Defense Fund; Columbia University’s School of International and Public Affairs