Policy options to mitigate the fiscal impact of road transport decarbonization: Application to Costa Rica

Abstract

Decarbonizing road transport – through electrification, public transport, and walking and biking – can be a net social benefit thanks to reduced congestion, accidents, air pollution, and energy costs. However, governments face losing fuel and vehicle tax revenue. We develop for the first time a method to assess options to maintain fiscal revenues without hampering decarbonization benefits for firms and households. We estimate the financial impact of transport decarbonization on the government, firms (buses, taxis, freight, and other private uses), and households grouped by income level and region of residence. Then, we evaluate how the government can use energy, property, import, and distance-based tax adjustments to compensate for the fiscal cost of decarbonization, and the incidence of these adjustments on firms and households. We apply the method to Costa Rica, a country committed to reaching net-zero emissions by 2050 and where 20% of government revenue comes from transport taxes. Decarbonizing transport would cause a fiscal impact of −0.41% of GDP on average between 2023–50, which is lower than the financial benefits on households and firms: +1.49% of GDP. We show that a combination of tax adjustments would eliminate the fiscal impact while maintaining net benefits for all firms and households of all income levels and regions of residence.