Chapter 29: Environmental Pricing in Transport

Transport activity is inextricably linked with environmental damage. Economists traditionally urge policy-makers to adopt pricing solutions, in particular taxes, to reduce environmental damage rather than quantity restrictions or standards. This chapter examines environmental pricing, defined broadly to include emission taxes, product taxes, and subsidies, and compares it to alternative approaches. We begin with a simple formal model to demonstrate the relative efficiency properties of pricing solutions, before highlighting some of the associated implementation problems. We then extend the scope and realism of the analysis by examining the choice between regulatory instruments in the presence of several market distortions. The basic case for environmental taxes, set at the correct level, is shown to remain.