A Presumptive Pigovian Tax: Complementing Regulation to Mimic an Emissions Fee

If regulations are used to make cars and fuels cleaner, should gasoline taxes be used to manage demand for trips that pollute? Analysis of a well-composed program for Mexico City indicates that the emission reductions would cost 24 percent more if a tax on gasoline was not introduced. A simple analytical framework is developed to analyze the use of abatement requirements to make cars cleaner, and a gasoline tax to economize on the use of cars. The two instruments should be combined to mimic the incentives that would have been provided by an emissions fee. Thus, cleaner cars and fewer trips are analogous to competing suppliers of emission reductions; the planner should buy from both so that marginal costs are equal. Applying that rule, the marginal cost of emission reductions is, simply, the gasoline tax rate divided by emissions per liter. Copyright 1994 by Oxford University Press.