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Fiscal Policies to Reduce Motor Vehicle Externalities

Fiscal Policies to Reduce Motor Vehicle Externalities. Ian Parry Fiscal 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. Main externalities. Carbon Local pollution

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Fiscal Policies to Reduce Motor Vehicle Externalities

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  1. Fiscal Policies to Reduce Motor Vehicle Externalities Ian Parry Fiscal 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.

  2. Main externalities • Carbon • Local pollution • Traffic congestion • Traffic accidents • Road damage (for trucks) • Oil dependence (but difficult to define)

  3. If only fuel taxes available 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

  4. Magnitudes of externalities (for US) CO2: $22/ton or $0.20/gal. (or higher) Local pollution: $0.01/mile Congestion: $0.045/mile Accidents: $0.035/mile

  5. Corrective taxes: US

  6. Corrective taxes: Chile

  7. For countries like UK and Germany • 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.

  8. Better instruments 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

  9. Use revenues productively 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.

  10. Urban bus and rail fare subsidies 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

  11. Conclusion • 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

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