Fiscal Policies to Reduce Motor Vehicle Externalities

Ian ParryFiscal Affairs Department, IMF

Disclaimer: The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

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Carbon Local pollution Traffic congestion Traffic accidents Road damage (for trucks) Oil dependence (but difficult to define)

Main externalities

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Optimal fuel tax (passenger vehicles) =

CO2 damages per gallon

+

{congestion + accident + local pollution damage} per mile

×

miles per gallon

×

fraction of fuel reduction from reduced mileage

If only fuel taxes available

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CO2: $22/ton or $0.20/gal. (or higher)

Local pollution: $0.01/mile

Congestion: $0.045/mile

Accidents: $0.035/mile

Magnitudes of externalities (for US)

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Corrective taxes: US

Gasoline (cars) Diesel (trucks) Total

Corrective tax, $/ga. 1.25 1.15Revenue, $bn 158 41 198

Current tax, $/ga. 0.38 0.44Revenue, $bn 53 17 70

Source. Parry (2011).

Table 1. Corrective Fuel Tax Estimates and Revenue: US(year $2007)

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Corrective taxes: Chile

Gasoline (cars) Diesel (trucks) Total

Corrective tax, $/ga. 2.35 2.09Revenue, $bn 1.8 1.5 3.3

Current tax, $/ga. 1.05 0.35Revenue, $bn 0.9 0.3 1.2

Source. Parry and Strand (2012).

Table 2. Corrective Fuel Tax Estimates and Revenue: Chile(year $2007)

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Corrective tax levels higher than for the US, because on average roads are more congested.

Given that fuel tax rates already high, main issue is to re-structure transportation taxes rather than raise more revenue from them.

For countries like UK and Germany

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Include per mile charges (metered by GPS)

Congestion on busy roads that rise and fall during rush hour.

Accidents ideally varies with risk factor

Road damage for trucks, varying with axle weight

Better instruments

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To fund socially desirable transportation projects, or reduce other taxes (e.g., on work effort or investment).

If revenues not used productively, undermines case for higher fuel taxes.

Use revenues productively

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Significant subsidies do seem justified:

Gains from reducing congestion (much larger than environmental gains)

Scale economies

--reductions in wait times

--reductions in access costs

--reductions in average cost/passenger mile

Urban bus and rail fare subsidies

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Strong case for using fiscal policies to address transportation externalities. But need: more analytical work on magnitude of externalities to better target externalities prioritize among transportation investments

Conclusion