The economics of low emission zones

This paper provides two microeconomic models that derive the social cost of a low emission zone (LEZ) for light vehicles. We apply the models to a proposed LEZ for light vehicles in Stockholm, which would prohibit diesel cars of Euro 5 or lower and gasoline cars of Euro 4 or lower in the inner city (25 km2) and conduct a cost-benefit analysis of the proposed LEZ. The first model is based on how an increase in user cost impacts traffic volumes in the inner city. This rather conventional user cost calculation of drivers’ loss requires however some strong assumptions. The second model shows that drivers’ losses can be calculated based on price changes observed on the used car market. Our empirical results indicate that the welfare loss resulting from the two models are of the same magnitude. The forecast benefits of the LEZ consist primarily of air quality improvements leading to health benefits. Even if our empirical results must be interpreted with caution, it seems clear that the costs considerably outweigh the benefits in this case study.