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Economical driving and taxation of road use

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  • Bjertnæs, Geir H.M.

Abstract

A tax on fuel that promotes a more fuel-saving driving style leads to both fewer accidents and less noise pollution per mile driven, but also more driving due to a lower cost of driving. The present study contributes to the literature by calculating second-best optimal taxes on fuel and vehicle miles travelled within a model framework that incorporates such tax-induced impacts on externalities. The study shows that the current US tax wedge between gasoline and non-polluting goods, approximately USD 0.3 per gallon, is far below a conservative estimate of the second-best optimal tax wedge of approximately USD 2.2 per gallon, and even further below best-practice estimates of USD 3.5–4.38 per gallon. The current UK tax wedge is slightly below a conservative estimate of the optimal tax wedge of approximately USD 3 per gallon. The study also shows that the second-best optimal tax rate on fuel exceeds the marginal damage of fuel-related externalities when combined with a tax on vehicle miles travelled. The tax on vehicle miles travelled is reduced below the marginal damage of mileage-related externalities in this case to prevent excessive taxation of driving.

Suggested Citation

  • Bjertnæs, Geir H.M., 2025. "Economical driving and taxation of road use," Energy Economics, Elsevier, vol. 142(C).
    • Handle: RePEc:eee:eneeco:v:142:y:2025:i:c:s0140988325000167
    DOI: 10.1016/j.eneco.2025.108193
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    More about this item

    Keywords

    Transportation; Optimal taxation; Environmental taxation; Global warming;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

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