in 2005 from Energy D ́etente. For Iceland and Poland we used the median of pre-tax price and tax for all European countries, 473 cents and 327 cents respectively.

- _αG_ : **Total government spending over GDP:** Parry and Small (2005) use central values of 0.35 for the U.S. and 0.45 for the U.K., based on summing average labor and consumption tax rates in Mendoza _et al._ (1994). We use two sources for data on general Government expenditure: the OECD stats and World Economic Outlook (WEO).<sup>11</sup> We averaged government expenditure for the period 2005–07 so as to smooth variability.

- _αF_ : **Fuel production shares:** Using the the shares of gross domestic production spent on motor fuel, Parry and Small (2005) set values of 0.012 values for the U.S. and 0.009 for the U.K. The calculation is based on n 1999 consumption of motor fuel multiplied by the gasoline price/gal net-of-tax over GDP. For our estimates we use data for billions of barrels of Motor gasoline consumed by each country in 2006 from IEA. The gasoline price net of tax ( _qF_ ) that we use is from Energy D ́etente.

See Table 6 for country-specific parameter values, and Table 7 for the list of data sources.

# **3. Optimal Fuel Taxes for Selected Countries**

In this section, we estimate the optimal motor fuel taxes for the group of countries considered in this study, which includes OECD members and the BRICs (Brazil, Russia, India and China) and South Africa. These countries, as a group, account for more than 80 percent of fossil-fuel related green house gas (GHG) emissions (see Fig. 2). Note that these emissions include coal emissions which may be the predominant source in some countries, like China.

Table 3 shows the estimated optimal motor fuel taxes, given the values of the benchmark parameters, for our group of countries. These results should be taken as broadly indicative and not as precise estimates of the optimal taxes. We shall discuss their sensitivity to key parameters below. In Table 3, the countries are sorted, in descending order, by the difference between the optimal tax on motor fuel ( _tF_ ) and the actual tax ( _t_<sup>0</sup> _F_<sup>).Countries</sup> undertaxing motor fuel the most appear at the top of the table while countries that would be overtaxing motor fuel the most appear closer to the bottom of the table.

China and the USA, the two largest transport oil-related GHG emitters in 2006 according to data from the International Energy Agency (IEA) (see last column in Table 3) are among the six countries that are undertaxing fossil fuels. The rest of the countries that are undertaxing are among the few countries in the world that individually account for more than 2% of total transport oil-related emissions.<sup>12</sup> Note that the size of a country’s

> 11 OECD.Stat includes data and metadata for OECD countries and selected non-member economies. The World Economic Outlook (WEO) database contains selected macroeconomic data series from the statistical appendix of the World Economic Outlook report, the result of analysis and projections carried out by IMF for many individual countries and country groups.

> 12 In the table, only Germany, Japan, France Italy and India show transport oil related emissions of more than 2% of world total. Outside our list of countries, Iran and Saudi Arabia, each accounting for 2.1% ot total transport oil-related emissions are the only countries with comparable high fuel oil emissions in 2006

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