# III. Literature Review

Broadly speaking, this paper contributes to the discussion on getting the energy price right through a “cost-effectiveness” approach. While existing energy taxes are not necessarily based on carbon emissions, they could effectively reduce emissions and other negative externalities. This approach examines energy prices/taxes against the result of achieving a climate-related outcome (Parry, Heine, Lis, and Li 2014; Mooij, Keen, and Parry 2012). Theoretically, imposing a tax on an energy product would increase its price and reduce the quantity consumed, and in turn emissions. The quantity reduced depends on the elasticities of supply and demand, which vary across groups of population. The “cost-effectiveness” approach relies on empirical results in determining the effectiveness of raising the energy price through tax. A recent study by Köppl and Schratzenstaller (2022) reviewed empirical effects of carbon taxes in relation to a multiple impact matrix including environmental and macroeconomic impacts. A consensus is emerging that an appropriately designed carbon tax will dampen emissions (or at least their growth) without jeopardizing economic growth. Studies that examine actual/ex-post outcomes of carbon prices have a relatively short history with limited geographical coverage (mostly for Europe) but are attracting increasing attention. Another recent meta-review of ex-post analysis from Green (2021), on the other hand, revealed that actual reduction in emissions from carbon pricing is limited though it varies considerably across sectors, and a carbon tax performs better than Emissions Trading Schemes (ETS).

Within this approach, studies on the impact of fuel price on emission intensity are sparse but emerging. Carbon tax increases fuel price and affects consumer behaviors through the price signal. In most countries where explicit carbon tax does not exist, the impact of marginal fuel price change due to fuel tax could be a proxy of the carbon tax effect. A few recent studies have used energy price change as a proxy to study the impact of carbon tax (Coste, Cali, Cantore, and Heine 2019; Mundaca, Strand and Young 2021). Most studies on the effectiveness of fuel prices or carbon taxes focus on their environmental or economic impact only or separately. Few studies are available that target a combined economic and environmental performance matrix, such as emissions intensity, _i.e._ , the ratio of emissions to a non-emission measure, usually GDP. This is surprising as emissions intensities are measures of both theoretical and practical importance, and has been adopted as targets at the firm, sector, and country levels (Herzog, Pershing, and Baumert 2006) including as Nationally Determined Contributions (NDCs) target. In this stream, Ryan et al. (2009) examines the impact of fiscal measures on fleet emission intensity for EU15 countries and found that fuel and vehicle taxes, rather than voluntary agreements of automobile manufacturers, have an impact on emission intensity. Brännlund et al. (2014) analyzed carbon intensity of Swedish industry using firm-level data and found that it responds to both carbon tax and fuel price. A few more studies examine the relationship between energy price and energy intensity (Filipović et al. 2015; Grubb et al. 2018).

To the best of our knowledge, this might be the first study on the impact of fuel prices on emission intensity of the transportation sector for Brazil utilizing insights from panel analysis. We benefit from the World Bank’s recent Economic Memorandum for Brazil (Hanusch Ed. 2023) in understanding the context of Brazil’s economic development and environmental challenge nexus. While most studies on Brazil’s fuel price elasticities of demand adopted time series analysis at national aggregate level, we are informed by a few studies that employed panel analysis at the state or municipality level (da Silva et al. 2009; Santos 2012; Uchôa, et al. 2019; Heine et al. 2021). Another recent paper studies the environmental impact of fuel prices in Brazil using time series analysis that examines aggregate CO2 at the national level (Filho et al. 2021). Our empirical strategy of panel analysis is also inspired by studies on the economicenvironmental relationship for other regions/world including Baltagi and Griffin (1983) and Yao (2021).

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