Is it environmentally desirable to encourage public transport through taxes? Evidence of Sandmo’s hypothesis in Spanish households

Sandmo (2009) suggests that the use of environmental taxes to promote the consumption of “clean goods” could have unwanted effects in that it leads to the consumption of “dirty goods”. This would therefore cast doubt on both the efficiency of environmental policy measures that act through price setting and the concept of double dividends which could be extracted from the environmental taxes. In this context, this paper illustrates the above hypothesis as applied to transport consumption in Spanish households. To this end, we simulate two alternative fiscal reforms and analyze their impact based on the complete demand model proposed by Deaton and Muellbauer (1980). The first reform establishes a 1% increase in the price of fuels, modifying the rate of VAT. Using this same approach, the second reform simulates the former measure together with a 1% decrease in the price of public transport. The results obtained confirm Sandmo’s hypothesis. Expenditure on fuel increases by 0.119% in the first reform and 0.140% in the second. On the contrary, public transport expenditures are reduced respectively by 0.039% and 0.978%.