Back Matter
Author: Ian W.H. Parry1
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

Appendix. Some Details on Calculations Underlying Section III

Local Pollution Damages. We start with a value of US$0.006 per kilometer from the U.S. literature (see above), and then make two adjustments to extrapolate this figure to Mauritius.

First, we adjust for differences in the value of a statistical life (VSL), where the VSL reflects people’s willingness to pay for mortality risk reductions expressed per fatality avoided. The VSL is used to quantify mortality effects, which is by far and away the largest component of damages from the U.S. studies. To extrapolate the U.S. VSL to Mauritius, we employ the commonly used formula (e.g., Cifuentes and others, 2005, pp. 40–41):

(1)VSLM=VSLUS(IMIUS)ηVSL

where IM and IUS denote real per capita income in Mauritius and in the United States, respectively. ηVSL is the elasticity of the VSL with respect to income (i.e., the percent increase in the VSL in response to a 1 percent increase in real income). From World Bank (2009) we assume IM/IUS is (US$12,480/$46,970=) 0.266, based on PPP exchange rates.

The appropriate value for is unsettled at present. A widely cited study by Viscusi and Aldy (2003) suggests a value of around 0.5, which is consistent with the views of Alan Krupnick, a leading expert on the issue.34 On the other hand, Hammitt and Robinson (2011) argue for using a value of unity, or even higher. Here we take a compromise and use a value of 0.75.

Using (1) and the above data, the VSL for Mauritius is 37 percent of that for the US. We assume the U.S. VSL is Rs 108 million (US$6 million), based on the National Research Council (2009) and current practice by the U.S. Environmental Protection Agency and converting using the PPP rate (Rs 18 per US$1). Thus we obtain a VSL for Mauritius of Rs 40 million (US$2.2 million).

Second, we make a crude adjustment for differences in emission rates. Given lack of data on the in-use vehicle fleet, we hazard the guess that emission rates per kilometer are twice as high in Mauritius as in the United States, due to the older vehicle fleet and lower portion of cars initially subject to emissions standards, which were recently aggressively tightened across the major vehicle manufacturing countries.

Multiplying the U.S. figure by the ratio of VSLs and then doubling it gives approximately Rs 0.08 per kilometer.

Marginal costs of congestion. The marginal cost of traffic congestion depends on the marginal delay, or the increase in travel time to other road users, due to the added congestion caused by additional driving by one vehicle. Marginal costs also depend on how people value the increase in travel time.

To obtain marginal delay for Port Louis, we start with an estimate of the average delay caused by congestion. This can be inferred from comparing observed travels speeds with speed under free-flow conditions. Based on a (slightly dated and therefore conservative) assessment of congestion in Port Louis by Menon (2004), we assume that travel speeds at peak period are 10 kilometers per hour and free-flow speeds (with no congestion) would be 25 kilometers per hour. Inverting these speeds, we can infer that on average the extra travel time per kilometer due to congestion at peak period in Port Louis is 3.6 minutes (0.06 hours), which is likely to be an underestimate. Assuming traffic is essentially free-flowing in the off-peak period (weekends and non-rush hours during weekdays when commuters are not on the roads) and that vehicle mileage is equally distributed across peak and off-peak periods, the delay averaged over all driving in Port Louis is 1.8 minutes (0.03 hours) per kilometer.35

An extra vehicle on a road slows travel speeds by more on a road that is already congested (where there is less room on the road for the vehicle) compared with a road that is relatively free flowing. Moreover, the added delay imposed on others increases with a greater number of vehicles on the road. For these reasons, the marginal delay rises with more traffic on the road. From Small (1992, pp. 70–71), we assume that marginal delay is four times the average delay, or 7.2 minutes (0.12 hours) per kilometer.36

We were unable to obtain a breakdown of vehicle miles travelled by urban/rural region. We hazard the guess that 25 percent of driving occurs in Port Louis, 40 percent in other urban areas, and 35 percent in rural areas. Furthermore, we assume that marginal delays in other cities are one-third of those for the (highly congested) capital, and zero for rural areas (this follows estimates in Parry and Strand, 2010, for Chile). Weighting marginal delays in different regions by their shares in nationwide mileage, we therefore obtain marginal delays averaged across the country of 2.6 minutes (0.044 hours) per kilometer. Although this calculation may appear very ad hoc, alternative plausible assumptions about mileage shares and relative marginal delays across regions have a relatively modest effect on our (ballpark) figure.

According to economic theory, people supply work effort up to the point where their benefit from additional work effort—the net of tax wage per hour—equals the value of the time they forgo in other activities, such as leisure time or work in the informal sector (e.g., Becker, 1965). If people value the pure disutility from an extra hour of work and an extra hour of travel time equally, then the value of travel time (VOT) should approximately reflect the net-of-tax wage. More generally, travel might be valued at less than the net wage if, for example, people prefer to be in a car rather than at work, or vice versa if they prefer the work environment to being in a car.

Most reviews of the empirical literature suggest a VOT for personal auto travel equal to about half the market wage (e.g., Waters 1996; DOT, 1997; and Mackie and others, 2003). Making a standard assumption for the U.S. that the VOT equals half the market wage for urban areas implies a U.S. VOT of about $10 per hour.37 To extrapolate the VOT to Mauritius, using an analogous expression to that in equation (1), we multiply by the ratio of per capita income in Mauritius to that in the United States (0.266), where this ratio is raised to the power of the VOT/income elasticity. Estimates of this elasticity for high-income countries are typically around unity (e.g., Wardman 2001; Mackie and others, 2003). Although it is not clear that this estimate would still be valid for lower income countries like Mauritius, in the absence of evidence to the contrary, we assume the elasticity is unity. This implies a VOT for Mauritius of US$2.7 or Rs 49 per hour.

Multiplying marginal delays by the VOT gives marginal congestion costs of approximately Rs 2.1 per kilometer for the nation as a whole. For Port Louis, our estimated marginal congestion costs are approximately Rs 12 and 6 per kilometer for peak driving, and averaged over time of day, respectively.

Marginal external cost of traffic accidents. Assessing to what extent policies are warranted to reduce the incidence of road accidents is tricky. While some accident risks (e.g., injury to pedestrians), may not be taken into account by individual drivers, other risks (e.g., injury risks to drivers in single-vehicle collisions) might be. Here we mainly focus on mortality risk given that, for lower and middle income countries, this appears to be the largest determinant of accident externalities (e.g., Parry and Strand, 2010).

According to the Mauritius CSO (2010a, Table 2.20), there were 140 road deaths in Mauritius in 2009, of which 54 were pedestrian deaths and another 16 were pedal cyclist deaths. We make the common assumption that all pedestrian and pedal cyclist deaths are external. Of the deaths to vehicle occupants and autocycles/motorbikes, many of these are in single vehicle accidents, and represent internalized risks. To what extent injuries in multi-vehicle collisions represent external costs, as opposed to costs taken into account by individual drivers, is unsettled. All else constant, the presence of an extra vehicle on the road raises the likelihood that other vehicles will be involved in a collision, but a given collision will be less severe if people drive slower or more carefully in heavier traffic. We therefore do not count these deaths as external.

External fatalities (70) are valued using the VSL (Rs 40 million). We therefore obtain a total external cost of Rs 2,800 million.

There are various other dimensions to external accident costs, such as non-fatal injuries, third-party property damage, and traffic hold-ups. Due, in part, to a lack of local data needed to quantify these other costs we simply assume they are the same in size, relative to the external costs from fatality risk, as estimated for by Parry and Strand (2010) for Chile, about 15 percent. Thus, we obtain total external costs of Rs 3,220 million. Dividing by total vehicle kilometer travelled by all vehicles (4,050 million) gives an average external cost (across all vehicles) of Rs 0.8 per mile.

Optimal Fuel Tax Assessment. Parry and Strand (2010) discuss a conceptual framework (based on prior literature) for estimating optimal fuel taxes. The main complication is that externalities that vary with kilometers driven, rather than fuel use, need to be scaled back because a large portion of the tax-induced reduction in fuel comes from improvements in fuel economy (which do not affect these externalities). In fact, if all of the reduction in fuel use came from increased fuel economy and none from reduced driving, there would be no impact on mileage-related externalities. For Chile, 40 percent of any tax-induced reduction in fuel use comes from reduced driving (Parry and Strand, 2010). Given that vehicle ownership taxes in Mauritius already create significant incentives for higher fuel economy, we assume 50 percent of the gasoline demand elasticity reflects reductions in driving, hence we scale back mileage-related external costs by 50 percent in computing optimal fuel taxes.

Mileage-related externalities include congestion and accidents. But they also include local pollution, given that vehicles are initially subject to uniform emissions per mile standards (that is, buying a fuel efficient vehicle does not reduce emissions, if all vehicles, regardless of their fuel economy, meet the same emissions standard).

One further complication is that driving on congested roads (which is dominated by commuters) tends to be less sensitive to higher fuel prices than rural or off-peak driving. This reduces congestion benefits from fuel taxes as a disproportionately large amount of the reduction in driving occurs on uncongested roads. Following Parry and Strand (2010), we scale back congestion benefits by one-third to make some allowance for this.

All externalities are converted from a per kilometer basis to a per liter basis by multiplying by fuel economy (13 kilometer per liter).38 Thus, using external costs discussed above, the optimal gasoline tax is computed by 13 × (0.06 + 0.5 × (0.08 + 2.1 × 0.67 + 0.8)), which gives Rs 15.6 per liter.

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1

An earlier version of this paper was written as part of an Article IV consultation between the International Monetary Fund and the Mauritian authorities. I am grateful to Mahen Bheekhee, Martin Petri, Kenneth Small, and Katsiaryna Svirydzenka for helpful comments and suggestions.

2

For example, achieving the Millennium Development Goals may require low-income countries to raise their tax-GDP ratios by around 4 percentage points (United Nations, 2005).

3

The island of Mauritius is located in the Indian Ocean to the east of Madagascar. It has a population of 1.3 million and per capita income (measured in Purchasing Power Parity) of approximately US$13,000 (World Bank, 2009).

4

As discussed below, this feebate taxes the CO2 emissions per kilometer of vehicles in proportion to the excess over the average CO2 per kilometer for the new vehicle fleet and provides a corresponding rebate or subsidy for vehicles with below average CO2 per kilometer.

5

These studies apply to developed countries, where revenue and distributional goals can, in principle, be met through the income tax and benefit system. In developing countries, receipts from the personal income tax are low, reflecting the relatively large informal sector and tax evasion and avoidance opportunities for the wealthy (IMF, 2011b). For these countries, from a practical perspective, some taxation of individual products could make sense on revenue and equity grounds.

6

In fact, it has sometimes been claimed that environmental taxes can improve the environment and increase employment at the same time. However, the literature on environmental tax shifts generally casts doubt on this assertion. Any employment gains from revenue recycling tend to be offset as economic activity (and employment) contracts slightly in response to higher costs for energy and other products caused by the environmental tax (e.g., Bovenberg and Goulder, 2002; and Parry and Oates, 1999). In special cases, like work-related traffic congestion, employment can increase overall if reducing the externality itself has a positive feedback effect on labor supply, through raising the productivity of work effort relative to leisure.

7

Price volatility can be addressed, at least in part, through provisions like allowing firms to bank or borrow allowances over time, or price collars (where the government steps in to sell allowances if the price reaches a ceiling level and buy allowances when the price reaches a floor level. Emissions allowances can also be auctioned to raise government revenue. All these provisions make cap-and-trade system behave more like (a more complicated and less efficient) environmental tax.

8

Whether households under-invest in energy efficiency is contentious. Some (though not all) empirical studies for the United States find that consumers require very high implicit rates of return on energy-saving technologies, often in excess of 25 percent (e.g., Allcott and Wozny, 2009; Hausman, 1979; and Train, 1985). Some analysts believe this constitutes evidence that consumers misperceive energy efficiency benefits perhaps because of poor information. Another explanation, however, is that there might be hidden costs that make people reluctant to invest in energy efficiency, such as objectionable aspects of the quality of fluorescent lighting and high borrowing costs.

9

The passenger fee reflects specific charges on international flights, with some of the revenue earmarked for tourism and financing airport related services. The solidarity levy is another tax on airline tickets (1 Euro on economy class and 2 Euros on business and first class passengers) that is part of an international effort to raise money to combat HIV/AIDS, malaria, and tuberculosis in poor countries.

10

Figures in Mauritius rupees are converted using a rate of Rs 30 per US$1.

11

The MID is better than the EU ETS, in the sense that is focused upstream on all fossil fuels and therefore covers all potential sources of energy-related CO2; the emissions price is fixed rather than variable; and it raises revenue. The ETS is a downstream program focused on large stationary emissions sources (e.g., power plants) and fails to cover about 40 percent of emissions; prices have been volatile; and to date, allowances have largely been given away rather than auctioned (e.g., Ellerman and Joskow, 2008). Although a handful of countries have implemented or are considering some form of carbon tax, only the British Columbia tax so far comes close to the economically ideal policy (Republic of South Africa National Treasury, 2010, Table 8).

12

These damages are the same for all emissions releases, across all countries.

13

This figure is contentious, however, given disagreement over the appropriate rate at which to discount impacts from today’s emissions on future, unborn generations. And some analysts believe that these estimates to not adequately handle the risks of extreme climate change outcomes. In fact, emissions prices consistent with limiting projected warming to 2° C (the aspirational goal agreed to at the last round of climate talks in Cancun, Mexico 2010), even if implemented globally, would be considerably higher than the above damage estimate (e.g., Clarke et al., 2009), though this goal is rapidly becoming infeasible.

14

Applying the 2010 dollar/Euro PPP exchange rate to the CO2 price in Euros from www.pointcarbon.com.

15

We assume the PPP rate is Rs 18 to US$1 from the World Economic Outlook database.

16

Using the PPP exchange rate instead of the market exchange rate goes into the direction of burden-sharing, since poorer countries usually have more appreciated PPP exchange rates, reflecting the fact that non-traded goods tend to be cheaper in poorer countries. Using the market exchange rate would result in a carbon tax of approximately RS 600 per ton. Of course, from a global perspective it would be important to calculate the externality from CO2 in a PPP context if one uses PPP exchange rates for converting.

17

Furthermore, because the island is made of volcanic rock, this would appear to rule out use of carbon capture and storage technologies.

18

Road wear-and-tear is not assessed because this externality is a rapidly rising function of a vehicle’s axle weight and is therefore primarily caused by heavy-duty trucks rather than cars (e.g., United States, Federal Highway Administration, 2000).

19

Other effects include impaired visibility, reduced crop yields, building corrosion, and morbidity (chronic bronchitis, asthma, and other respiratory and cardiovascular diseases).

20

A more sophisticated assessment would adjust for other factors like differences in population exposure, in the composition of the exposed population (i.e., the fraction of the population that is vulnerable to pollution-health effects because of asthma or other pre-existing conditions), and in local topological and climatic factors affecting pollution dissipation.

21

Fuel economy data were obtained from the National Transport Authority of Mauritius.

22

The carbon content of diesel fuel is moderately (about 16 percent) higher than gasoline though, as already mentioned, other externalities dominate global warming.

23

GPS-based tolling systems have been introduced for trucks in Germany and seriously studied, but not yet implemented, in the United Kingdom and Holland for cars. Another congestion-mitigation policy is “Today Don’t Drive” programs, where vehicles can be driven in the downtown area only on certain days of the week. But these programs can be evaded if households use multiple vehicles (Davis 2008) and are inefficient. A further possibility involves reserving premium lanes for high-occupancy vehicles (HOVs) to encourage carpooling. However, HOV lanes have had limited success in the United States (e.g., Safirova and others, 2004) because some HOV passengers would not otherwise have driven on their own (e.g., children, people who would otherwise use transit). Moreover, HOV lanes may result in under-use of scarce road capacity if traffic flows on them are much smaller than those on other (heavily congested) freeway lanes.

24

This is approximately the diameter of the tolling area, if the average motorist drives to the center and back.

25

In the United States, about a third of the estimated reduction in driving in response to higher per mile costs comes from reduced overall vehicle demand and about two-thirds comes from reduced miles per vehicle use (e.g., Fischer and others, 2007).

26

For a detailed discussion of technological possibilities for improving fuel economy, see the National Research Council (2002).

27

The loss of cost-effectiveness may not be that great, however, if CO2 is only moderately responsive to pricing in other sectors.

28

A widely cited study for the United States by Small and Van Dender (2006) estimates that roughly 10 percent of fuel savings from improvements in fuel economy are offset by people driving more.

29

For more detail on how feebates work, see Small (2010). There is growing interest in feebates among policymakers (e.g., Greene et al. 2005, Fischer 2008). They have been discussed as an alternative to fuel economy regulations in the United States since the early 1990s. Worldwide, regulators have implemented modest feebates for consumers in Ontario in 1991, federal Canada in 2007, and France in 2008.

30

The database contains information on CO2 per kilometer, purchase price, and taxes paid, for each vehicle. I am grateful to Mahen Bheekhee of the Ministry of Finance in Mauritius for providing the data. In practice (as indicated by this database) taxes are not paid on about 25 percent of vehicle purchases because of exemptions for civil servants. If these exemptions are maintained, the average tax collected per vehicle purchase in the bottom row of Table 5 would be about 25 percent lower. Scaling back these exemptions would make sense on economic efficiency grounds, and would allow a lowering of excise tax rates, for the same revenue total collected by the government.

31

This tax rate is broadly consistent with incentives for reducing CO2 per kilometer under vehicle excise tax systems in the lower portion of the distribution of vehicles (ordered) by CO2 per kilometer in, for example, the United Kingdom (author’s calculations based on annual vehicle excises given in www.ifs.org.uk/fiscalFacts/taxTables). But the implicit prices on CO2 are extremely large. Assuming the average car is driven 10,000 kilometers a year for 15 years, the implicit CO2 price is Rs 11,333 per ton.

32

This may create an incentive to tamper with odometers. However, tampering is difficult (at least by amateurs) without leaving traces and there could be stiff fines for those who are caught driving without a functioning odometer. And fraud will become more difficult once a history of odometer readings has been built up for different drivers (an unusually low recorded mileage, relative to others or one’s prior driving record, would arouse suspicion).

33

PAYD schemes have emerged in several regions of the United States, partly in response to policy incentives. For example, in Oregon, insurance companies were offered a one-off tax credit of US$100 (Rs 3,000) for each motorist that signed up for PAYD. The same tax incentive might be reasonable for Mauritius. If, in response, 2 percent of motorists made the switch to PAYD each year, the annual revenue loss to the government would be modest at around Rs 15 million.

34

Personal communication, January 2011. Krupnick has been involved in a number of stated preference studies applying a common methodology for eliciting the VSL across countries with very different income levels.

35

Roughly speaking, from Menon (2004, Tables 4 and 5), we infer that 50 percent of weekly traffic occurs during the peak weekday period of 7–10 a.m. and 4–7 p.m. The same is broadly true, for example, of Santiago in Chile (e.g., Parry and Strand, 2010).

36

This is based, approximately, on reported estimates of the marginal to average delay ratio for congested urban areas. Estimates of the ratio of marginal to average delay typically vary between about 2.5 and 5.0. A value of 4 is implied by the Bureau of Public Roads formula, which is widely used in traffic engineering models. See, for example, Lindsey and Verhoef (2000) for further discussion.

37

The gross urban wage is taken from the U.S. Bureau of Labor Statistics (2006, Table 1).

38

We ignore the slight complication posed by the effect of higher fuel taxes on increasing fuel economy.

Reforming the Tax System to Promote Environmental Objectives: An Application to Mauritius
Author: Ian W.H. Parry