but benefit but benefit import-competing producers. Nor does it capture potentially, concerns with the impact not simply on the impact on profits and wage payments in the tourist sector but also on the volume of tourism travel. Importantly, where better-targeted instruments are available, these concerns may be best met by other means (such as a subsidy to the tourism sector).

# **D.   The Impact on Oil Prices**

28. **The critical first step in all incidence and compensation issues is: How far would charges on jet or maritime fuels be passed on to purchasers?** This is key to the first factor identified above: to the extent that the impact is not passed forward, so that aviation and maritime fuel prices rise by less than the full amount of the charge, so its impact on and through the sectors will be muted. Part of the impact would then be felt by suppliers of crude oil—including a number of low income countries that are new oil producers.

29. **The determinants of the degree of pass forward into fuel prices are complex—one key issue being the degree to which refiners can substitute between the production of taxed and untaxed fuels** . Box 6 considers the likely impact of a charge when such substitution is completely costless. The degree of pass forward is then likely to be high since producers can readily escape the tax by instead producing other fuels. As a rough order of magnitude, on average over 90 percent of a charge imposed on both marine and jet fuel might be passed on.

## **Box 6. The Impact on Oil Prices from Taxing International Aviation and Maritime Fuels**

Suppose first that ̳oil‘ is a homogenous product, and consider a specific charge of _T_ levied on its use in only one activity (aviation and or maritime). In this case, assuming the relevant industries are reasonably competitive and that the elasticity of demand is the same ( _E_ ) for both ̳taxed‘ and ̳untaxed‘ uses, the impact on the pre-tax oil price _P_ is approximately where is proportion of all oil consumed in the taxed sector and the elasticity of oil supply. The impact is thus smaller (i.e. less of the charge passed back to oil producers): (1) the smaller the amount of aviation/maritime fuel produced from the average barrel of crude oil input; (2) the smaller the share of global aviation/maritime fuel production that is covered by the charge (i.e., the greater the extent of developing country exemptions); and (3) the less elastic is the demand for these fuels and the more elastic is the supply of crude oil.

Broadly speaking, the impact is the same as that of a tax on all oil uses but scaled down by the share of oil covered by the tax in all oil production. The empirical evidence suggests that the elasticities of demand for and supply of oil are of broadly the same magnitude: according to IMF (2011), Ch. 3, the magnitude of oil demand and supply elasticities are both around 0.05 to 0.1 in the short run, though both are larger over the longer run.

This suggests that the bracketed term in equation (6.1) is around 0.5. Supposing that the share of aviation and maritime in global oil demands is 11 percent<sup>1</sup> and international fuel taxes are implemented globally (i.e., = 0.11), then a fuel tax of 10 cents per liter imposed on all aviation and maritime fuel demand would reduce the world oil price by around 0.55 cents and, conversely, increase the price to fuel purchasers by around 9.4 cents per liter.

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> 1 This is based on EIA (2011b) and IMO (2009).

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