Carbon Leakage from Fuel Taxes: Evidence from a Natural Experiment

We exploit a fuel tax increase in Portugal to identify its effect on cross-border fuel sales and associated carbon leakage in the Spanish border regions. Using a difference-in-difference strategy, we find that while gasoline sales remained unaffected, diesel sales in Spanish border regions increased by 6-9%. Synthetic control methods confirm these estimates and attribute this differential effect by fuel type to routes frequented by heavy-duty vehicles, with large diesel tanks. We estimate a carbon leakage equivalent to 14-20% of Portugal's annual mitigation commitment for road transport emissions. Our findings imply that heavy goods vehicles' strategic behavior undermines the potential mitigation effects and revenue gains of transport climate policy, underscoring the need for coordinated policies in similar federal or quasi-federal contexts.