An optimal fuel tax for Malta

Abstract

The number of vehicles in Malta has been increasing very rapidly in recent years. At the end of 2010, the number of licenced vehicles stood at just over 300,000. By the end of 2017, this number shot up to over 370,000. As the number of vehicles grows, so do the costs associated with driving. Anyone making use of their vehicle incurs a number of costs, such as refuelling and maintenance costs, amongst others. These are the private costs. However, and perhaps more importantly, such a person also imposes a number of costs on society in the form of negative externalities. The private costs are less than the social costs and hence, the amount of driving exceeds the optimum. Taxes, such as licence fees, registration taxes and fuel taxes, are one of the tools which may be used to reduce the amount of driving toward the optimum. This dissertation focuses on one of these taxes, namely the fuel tax. Using the methodology of Parry and Small (2004), an optimal fuel tax was calculated for Malta using 2012 data on the costs of passenger and commercial vehicle use. Based on the results, in 2012, the optimal taxes on petrol and diesel would have been equal to €1.93 and €1.97 per litre respectively. These are significantly higher than the actual rates levied on petrol and diesel in 2012, which were equal to €0.70 and €0.59 respectively. Were the optimal rates to be levied, the prices of petrol and diesel for that period would have been equal to €2.71 and €2.75 per litre respectively. Since the optimal fuel tax would raise the prices of petrol and diesel very significantly, this dissertation also explores a number of avenues which the government may take in order to reduce the public’s opposition to the tax increase or to avoid raising the tax by the full amount but still achieve the desired outcome.