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
, since they still pay the same excise tax rate. (Potential revenue losses from the feebate component are avoided, because the pivot point declines over time as the average CO 2 per kilometer of the new vehicle fleet falls).
Comparing the progressivity of alternative tax systems . Table 6 illustrates the overall progressivity of alternative tax systems, using a database of all (new and used) vehicle purchases for Mauritius for 2010. 30 Vehicles are grouped by CO 2 per kilometer, though the average pre-tax vehiclepricerises steadily with higher CO 2 per
Ian W.H. Parry, Mr. Dirk Heine, Eliza Lis, and Shanjun Li
Both problems are avoided by combining an ad valorem tax on vehicle sales with a feebate. The tax provides a stable source of revenue that does not decline as emission rates fall, and it does not distort the choice among vehicles because all vehiclepricesrise in the same proportion. In addition, the feebate provides ongoing rewards for all opportunities to reduce emission rates for all vehicles.
Feebates might also be used to reduce the emissions intensity of power generation. Generators with high emissions intensity would pay fees in proportion to the