Vehicle and Fuel Taxation for Transport Demand Management : Learnings from the Literature through a Development Lens

Correctly pricing private vehicles and their use is paramount to building sustainable, safe, and equitable transportation systems. However, determining the “right” price – the combination of taxes on vehicle purchase, ownership, and use – is a complex problem. Although a rich literature exists on the subject, it is built on evidence from developed countries. This paper synthesizes the lessons learned from the literature, theoretical and empirical, on vehicle and fuel taxation for managing private vehicle demand. In particular, the paper examines the efficiency and distributional impacts of purchase, ownership, and use taxes. The literature is unequivocal that taxing use dominates taxing purchase or ownership on efficiency grounds. Nonetheless, the latter instruments can still have important roles to play, for example, addressing specific market failures, for equity and political acceptability considerations, or for ease of enforcement. The paper also discusses the practical challenges of saliency, gaming, and evasion of taxes; how the effectiveness of taxes as policy instruments also depends on the availability of alternatives to driving; and what the emergence of electric vehicles means for optimal taxation. Importantly, the paper considers how these lessons, mostly derived from high-income countries with mature automobile markets, apply to developing contexts. In addition to the policy discussion, the paper conducts two exercises compiling empirical evidence. It compiles and compares estimates of the externality costs associated with private vehicle use, including congestion, local air pollution, greenhouse gas emissions, injuries, and noise. Similarly, it compiles and compares demand response elasticities to vehicle purchase, ownership, and use taxes. Both serve as useful references for researchers, development practitioners, and policy makers.