Optimal Fuel Taxation With Suboptimal Health Choices

Abstract

Transport has a large number of significant externalities including carbon emissions, air pollution, accidents, and congestion. Active travel such as cycling and walking can reduce these externalities. Moreover, public health research has identified additional social gains from active travel due to health benefits of increased physical exercise. In fact, on a per mile basis, these benefits dominate the external social costs from car use by two orders of magnitude. We introduce health benefits and active travel options into an optimal taxation model of transport externalities to study appropriate policy responses. We characterise the optimal second-best fuel tax analytically: when physical exercise is considered welfare-enhancing, the optimal fuel tax increases. Under central parameter assumptions it rises by 49% in the US and 36% in the UK. This is due to the low fuel price elasticity of active travel. We argue that fuel taxes should be implemented jointly with other policies aimed at increasing the uptake of active travel to reap its full health benefits.

Demand-side solutions to climate change mitigation consistent with high levels of well-being

“…Smaller general equilibrium models, focusing on individual sectors, are also well suited to better assessment of the effects of multiple constituencies on well-being. For example, modelling captures the premise that, with food and transport choices, the low-carbon option makes people healthier because it incentives them to eat a healthier diet and exercise more 77,78 .…”