Fiscal instruments are potentially among the most effective, and cost-effective, options for addressing externalities related to poor air quality, urban road congestion, and greenhouse gases. This paper takes a case study, focused on Mauritius (a pioneer in the use of green taxes) to illustrate how existing taxes, especially on fuels and vehicles, could be reformed to better address these externalities. We discuss, in particular, an explicit carbon tax; a variety of options for reforming vehicle taxes to meet environmental, equity, and revenue objectives; and a progressive transition to usage-based vehicle taxes to address congestion
of greentax reform options for Mauritius. A final section offers concluding remarks.
II. C onceptual C ase for E nvironmental T axes
The production and use of certain goods and services in the economy generate broader societal costs, or externalities, that are not taken into account by households and firms. For example, fossil fuel combustion produces CO 2 , the main greenhouse gas, and also local emissions that are harmful to human health (e.g., Intergovernmental Panel on Climate Change, 2007 ; Dockery and others, 1993 ; and Schwartz, 1994 ). And