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

3 Optimal fuel tax (passenger vehicles) = CO 2 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

4 CO 2 : $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)

5 Corrective taxes: US

6 Corrective taxes: Chile

7 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

8 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

9 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

10 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

11 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