Does Quebec Have the Right Gasoline Tax? An Empirical Investigation

Abstract

The objective of this article is to calculate the optimal gasoline tax for Quebec and, in particular, for its two largest urban areas: the Greater Montreal Area (GMA) and the Greater Quebec City Area (GQA). This optimal tax accounts for externalities resulting from traffic congestion, road accidents, local air pollution, and climate change. Our methodology draws on Parry's (2009) theoretical model, which we calibrate with parameters for the Quebec context from the literature or from original estimations. We find that the optimal gasoline tax should be $0.72/litre in the GMA, $0.65/litre in the GQA, and $0.28/litre in the rest of the province. Thus, at $0.292/litre, the actual level of excise tax turns out to be very close to the optimal level of gasoline tax if the congestion costs are internalized through other instruments such as congestion charges.