Localized Fuel Taxes and Consumer Behavior: Spatial Relocation and the Price Elasticity of Fuel Demand

In this paper, we examine how localized fuel taxes induce spatial relocation of purchases, and their implications for estimating the price elasticity of fuel demand. Our empirical approach exploits multiple regional fuel tax changes in Spain, combined with granular subregional data on fuel prices and purchases. First, we document substantial spatial relocation: near regional borders, the elasticity of diesel purchases with respect to cross-regional price differences is as large as -9.

Second, we show that failing to account for such relocation leads to a pronounced upward bias in estimated fuel price elasticities. Specifications that ignore cross-regional purchases suggest highly elastic fuel demand, whereas accounting for relocation renders fuel demand inelastic. Our findings highlight the relevance of spatial relocation in the observed responses to localized fuel taxes, and suggest that localized environmental policies may be less effective in reducing CO2 emissions than previously assumed.