Per Mile Emissions Taxes And Lump Sum Emissions Taxes: A Comparative Study Using A Mathematical Approach To Demand Estimation

Abstract

The primary purpose of this study was to utilize the mathematical approach to demand estimation developed in Culp (2004) to compare two common emissions based taxes. The model assumes Cournot-Nash behavior and divides the automobile market into five homogenous segments. A global optimization program is utilized to mathematically determine the range of values the coefficients of demand must take in each segment to satisfy market equilibrium. Simulations were performed to examine the comparative impact on social welfare of both the per mile emission tax (PMET) and the lump sum emission tax (LSET) in the automotive and travel markets. In the simulations, a global optimization program allows market conditions to change while holding constant the level of pollution reduction, satisfying the other constraints of the model, and satisfying each firm’s first order profit-maximizing conditions. The simulation found that in five of the thirty-two quarters examined, and regardless of market conditions, that the LSET produced more gains from trade. In simulations of the remaining quarters, the outcomes varied depending upon the cross price elasticity of vehicle demand and upon the sensitivity of consumers to vehicle operating cost. The simulations also show that an approximately 20 percent reduction in emissions from new vehicles is achieved by the LSET with a median tax rate of $155.74 per gram of average CO emissions per mile. Consequently, a vehicle that emits an average of two grams of CO per mile would pay a one-time fee of $311.48. The median tax rate required by the PMET is $0.00666 per gram per mile. Accordingly, a vehicle that emits two grams of CO per mile on average would pay $0.0103 per mile or $1332.46 for every 100,000 miles traveled. The difference between the two tax rates, required to achieve the same pollution reduction goal, is likely the result of consumer’s insensitivity to the rise in vehicle operating costs caused by the PMET. This result is consistent with the view that consumers highly discount future payments.