Greenhouse gas emissions and price elasticity of transport fuel demand Essay

Greenhouse gas emissions and price elasticity of transport fuel demand in Belgium - Essay Example The policy of increase in fuel tax by the Belgian government is taken into consideration in this article. The paper seeks to find the impact of an increase in fuel taxes on the consumption of fuels by estimating the price elasticity of fuel demand. Backdrop of the article The Kyoto protocol, named after the Japanese city, is an international agreement concluded in 1997, aimed at the reduction of the accumulated greenhouse gas emissions of the developed nations and lessening the intensity of global warming1. Since the start of negotiations on Kyoto Protocol, Belgian government adapted an ambitious position in the climate regime in the European as well as in the international level2.Belgium has also participated in the targets of reducing the greenhouse emission and has been successful overall in cutting down the intensity of emission by the importance of nuclear energy. But the intensity of emission is high in some sectors like heavy industry residential heating. But severe instances of emission are found to be generated in a rigorous basis from the road transport sector in Belgium which represents 20% of the all Green house gas emission3. Belgium is a small country in the respect that it is a price taker of the fuel prices in the international market as its demand has little or no effect on the international oil price. So the supply curve faced by Belgium can be thought to be infinitely elastic. Thus a change in the tax structure of the country is directly and fully gets reflected on the domestic prices and the quantity (fuel consumption) is directly related with the price elasticity of demand for fuels. Thus the prime parameter on which the quantity that is the fuel consumption depends in this case can be considered to be price elasticity of demand of fuels and thus we will analyze its impact with the help of theoretical understandings. Elasticity of demand Before moving into the realms of the topic in consideration it is necessary to clearly understand the co ncept of elasticity of demand. The elasticity of demand refers to the degree of responsiveness of quantity demanded of a commodity to a change in any of its determinants viz, price of the commodity, price of other commodities and income of the consumers. But in this paper we are only concerned with the price elasticity of demand4. Price elasticity of demand â€Å"The price elasticity of demand measures the sensitivity of the quantity demanded to changes in the price†5. In other words it is a measure of how much a quantity demanded of a commodity changes when its price changes. Mathematically the price elasticity of demand can be represented as the ratio of the percentage change in the quantity demanded of a commodity to a given change in price. Thus, Where, = Price elasticity of demand, = Change in quantity, =Change in quantity demanded6. Fig.1 In the above diagram the initial price was P0 and the quantity demanded was Q0. When price rose to P1 the quantity demanded falls to Q1 following the law of demand which states that for a normal commodity as price increases the quantity demanded falls as a result. In the diagram, the gap and the gap . Different types of price elasticity of demand The numerical value of price elasticity of demand varies from zero to infinity. In terms of its numerical value (i.e, degree of elasticity), there are generally five types kinds of price elasticity of demand. A. Perfectly Inelastic demand When the quantity demanded of a commodity does not respond to the change in its price, then the elasticity of demand is said to be perfectly inelastic demand. The numerical value of inelastic demand is zero7. Fig. 2 In the above diag