Automotive transportation, one of the largest sectors of the U.S. economy, has numerous societal benefits but also many downsides — pollution, fatalities, congestion. Getting the price individuals pay for driving to reflect its true cost to society is one of the most significant challenges of public policy.

A 2009 paper from the World Bank, “Fiscal Policy Instruments for Reducing Congestion and Atmospheric Emissions in the Transport Sector,” provides a useful overview of policy tools for reducing the undesirable consequences of transportation.

Five primary tools are addressed: congestion charges, fuel and vehicle taxes, emissions fees, and subsidies. The theoretical foundations of each tool are presented and real-world examples are detailed based on recent research.

The report notes that because all cities, regions and countries face unique challenges, no single policy is universally effective. Instead, a range of fiscal instruments must be selected and adjusted to reduce transportation externalities in the most efficient manner possible.

• Congestion charges are fees on vehicles travelling during certain hours, and are most often used in large cities. The primary goal is to speed traffic flow in a congested area, which has numerous benefits, including faster transit times of those who choose to travel, lower vehicle emissions and reduced fuel consumption. The report finds that London’s system, established in 2003, has reduced trips by 12%, with more than 50% of those travelling shifting to public transportation; in 2005 the annual environmental benefits were the equivalent of $6.9 million. The report indicates that a similar system for New York City could reduce daily traffic volume up to 13%, with associated environmental and societal benefits.
• Fuel taxes are widely used and traditionally used to pay for road maintenance and other services. In 2005 taxes ranged from an average of just over $3 per gallon in Europe down to 34 cents in Boliva; U.S. fuel taxes are at the low end of the scale, just 38 cents per gallon. The report indicates that if gasoline were taxed in the United States at the same rate as in Europe, consumption would be reduced by 57% and CO₂ emissions would fall significantly.
• Vehicle taxes are one-time or recurring charges on vehicles. When the goal is to encourage greater efficiency, tax amounts can be based on fuel consumption, emissions, gross weight, engine size, or fuel type. As with all taxes, those on vehicles must be carefully designed to have the desired effects. A famous U.S. example is the “light trucks” from the “gas guzzler tax,” which allowed sales of  SUVs to flourish.
• Emissions taxes are levies added to the price of a fuel that pass the negative externalities of its use back to users so they can better-informed decisions. Unlike vehicle taxes, emissions taxes are directly proportional to a car or truck’s use — the more miles that are driven, the greater the amount. Unlike carbon cap and trade, a carbon tax has the advantage of being relatively understandable, and revenue can used to help fund environmental projects and ensure that the tax doesn’t fall unduly on lower-income consumers.
• Subsidies are government resources used to promote what is seen as societally desirable practices or technologies. Funds for the capital and operating costs of public transportation reduces the percentage that fares must support, decreasing the cost to consumers, increasing public-transit usage, and cutting road congestion and transportation emissions. Supports for the production of biofuels are intended to decrease their cost and thus encourage their use.

Tags: carbon, congestion, emissions, fossil fuels, traffic, mass transit, cars

By Leighton W. Klein | June 30, 2009