The taxation of drivers and the choice of car fuel type

Abstract

In this paper the choice of the car fuel type is studied. In the Dutch situation three types are important: gasoline, diesel and LPG, with 80% of the cars using gasoline. Incentives for using diesel or LPG are provided by the tax system that implies higher fixed cost, but lower variable cost for users of these fuel types. We start by studying fuel type choice on the basis of a logit model, and move on to estimate demand functions for kilometres driven for social purposes while correcting for the possible selectivity bias. We find that diesel and LPG are in general regarded as inferior alternatives, but that monetary incentives are sufficiently strong to overcome this hurdle for drivers with a large demand for kilometres. We also find that there are significant effects of the lower variable cost for diesel and LPG drivers on their demand for kilometres. The conclusions are confirmed by estimation of a structural model in which fuel type choice and demand for kilometres are consistently explained on the basis of one set of preferences and unobserved heterogeneity is taken into account.