OPTIMAL ENVIRONMENTAL TAXATION IN THE PRESENCE OF POLLUTION AND CONGESTION: A GENERAL-EQUILIBRIUM ANALYSIS

Xiaoxiao Ma
Laura Marsiliani
Thomas I. Renström

We derive the structure of optimal fuel and road taxs in an economy with (i)
vintage vehicles (new and old vehicles) and, (ii) pollution and congestion
externalities caused by driving. It is shown that the optimal road taxes on
new vehicles are higher in that new vehicles generate more mileage of
travel which implies more congestion. We also derive the optimal fuel tax
when it needs to be uniform. We next calibrate the model on U.S. data. Here,
in the presence of a congestion externality, the optimal fuel tax for old
vehicles is higher which shows that the marginal cost of pollution outweighs
the marginal cost of congestion. When we implement a uniform fuel tax, its
rate lies between optimal ones for new and old vehicles and the road tax is
the same for both types of vehicles. We also find that long-run utility is
marginally higher under a full set of tax instruments.

Keywords: Fuel efficiency, fuel tax, road tax, environmental quality, pollution, congestion.

JEL classification: D91, E20, H23, I31, Q53, Q58, R48.

Correspondence to:

X. Ma, Institute for Transport Studies, University of Leeds, 30-40 University Road, Leeds, LS2 9JT, UK.
Email: [email protected] Web: https://environment.leeds.ac.uk/transport/staff/8829/dr-x-ma

L. Marsiliani, Department of Economics and Finance, Durham University Business School, Mill Hill Lane, Durham, DH1 3LB, UK.
Tel: +44-(0)191-334 6363.
Email: [email protected] Web: http://www.dur.ac.uk/laura.marsiliani/

T.I. Renström, Department of Economics and Finance, Durham University Business School, Mill Hill Lane, Durham, DH1 3LB, UK.
Tel: +44-(0)191-334 6369.
Email: [email protected] Web: http://www.dur.ac.uk/t.i.renstrom/

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