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Optimal fuel taxation with suboptimal health choices

Author

Listed:
  • Mattauch, Linus
  • van den Bijgaart, Inge
  • Klenert, David
  • Sulikova, Simona
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.

Suggested Citation

  • Mattauch, Linus & van den Bijgaart, Inge & Klenert, David & Sulikova, Simona, 2020. "Optimal fuel taxation with suboptimal health choices," INET Oxford Working Papers 2020-22, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    • Handle: RePEc:amz:wpaper:2020-22
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    More about this item

    Keywords

    Transport Externalities; Congestion; Active travel; Fuel; Health Behaviour; Optimal Taxation;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy
    • Z28 - Other Special Topics - - Sports Economics - - - Policy

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