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We find that larger automobiles had the fastest compliance schedule while popular models adjusted very slowly. Also gasoline-fuelled models had a faster adjustment pattern than ethanol cars. Additionally, we analyses the current relationship between pollution emissions and car characteristics in order to orient policy formulation. We find a positive relationship between emissions rates and horse power, concluding that although the current value-added sale car tax is not environmental harmful, a tax differentiating clean from dirty models, within each tax bracket, could create substantial incentives for emission control in the future. Ban air pollution is a serious environmental problem in developed as well as in most developing countries. In the case of Brazil, air pollution concentrations have been rapidly increasing in the major urban areas over the last decades. As elsewhere, this expansion has been caused mainly by the increasing use of vehicles. Today, emissions from vehicles are the major source of air pollution in Brazier’s largest cities. In 1 997 in So Paulo, for example, private cars were responsible for approximately 75% of carbon monoxide (CO), 73% of hydrocarbons (HCI), 23% of nitrogen oxides (Knox) and 10% particulate matter (PM)

Costs associated with high air pollution concentrations in large cities are known to be important. Human health costs predominate, and range from eye irritations to respiratory problems and increasing cancer rates, all of which induce direct and indirect costs to society. They also estimate the health costs associated with concentration levels in excess of air pollution standards, finding a loss of approximately LOS$ 700 million per year in the early sass.

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Even when consumers can perceive individual emission damage, they are unable to reduce alone the aggregate social emission costs. Consequently, heir preferences will usually not consider fuel and car cleanliness. In the presence Of this negative externalities, environmental regulation is required. If we were able to measure emissions by individual cars, the first best incentive option for car emission control would be the imposition of a Poisoning tax on each source according to its marginal contribution to air pollution damages.

This would allow flexibility for car owners in the choice of emission reduction strategies. However, such first best approaches can incur high administrative cost. As put by Nines (1996), even if tamper-resistant misinterpretation from tailpipes were available at reasonable costs, such devices do not detect important non-tailpipe pollution and, therefore, high costly reliable periodic car monitoring would be required. Consequently, the application of car emission control policies would have to reckon on regimes which do not require direct emission monitoring.

When emission output measurements are difficult, the economic literature on Mbps proposes instead that regulators may apply first best taxes on the use of inputs and products which are related to emissions. For car emissions, fuel and automobile taxes are good candidates for this option. Fullerton and West (1999 – hereafter FIN), have derived a set of fuel and car optimal taxes which are able to mimic, at least in theory, the unavailable tax on emissions. In order to derive a closed form solution, FIN consider emissions per gallon (PEG) and miles per gallon (MPEG) only to depend on is, the size of the car.

Under these specific technological conditions, FEW propose a closed form solution for a fuel tax (tug) differing according to characteristics of the vehicle at the pump. The owner of car model I, would pay a tax given by g s MPEG s Meet:- where :, represents the marginal social cost of a unit of emissions and PEG ND MPEG represent car features. More generally, we could specify such a tax to be a function of other car characteristics which are likely to affect PEG and MPEG, as well as emission features of different fuel types.

Admitting regulators know the mileage consumption and useful life of each car model I owned by consumer j, an equivalent car sale tax would consist of the present value of the above fuel tax. This car tax could be, instead, applied periodically for licensing purposes, and its value would be set by monitored mileage at that period. Both fuel and car taxes would make consumers perceive the emission- increasing cost of extra mileage consumption and recognize the emission- reducing benefits of fuel cleanness and economy as well as car pollution abatement devices.

Note that under this approach regulators must know the marginal social cost of a unit of emissions ( Moreover, this parameter will be location-specific since marginal damages are dependent on total pollution charges and the environment assimilative capacity which, in turn, varies according to atmospheric variables (e. G. , wind speed, temperature, humidity, etc). Suppose, however, that regulators know : and location-specific taxes can be applied. Although the fuel tax is simpler than the equivalent car tax, it would still require car features to be identifiable at the gas station.

Again such an approach is likely to generate high administrative costs in order to be feasible and reliable. Therefore, if we cannot mimic the first best solution with alternative taxation schemes, we would have to rely on second best market instruments. The ideal second best mechanism should create price incentives for consumers to drive fewer miles and, at the same time, buy cleaner cars. While the former decision is related to fuel use, the latter works through car price fermentations. A car tax based on the estimation of a vehicle’s Ann al emission is proposed by Zealand (1994) and Sieving (1998).

Emission rates per mile would be estimated based on car characteristics, and miles traveled could be measured by the change in the vehicle’s odometer in a given year. What makes this proposal different from the first best alternative proposed by is the lack of knowledge on each specific car’s PM. While If’s model assumes that it is possible to estimate individual PM for all car models in order to charge an emission gas tax at the fuel pump, Sieving (1998) only expects to be able to derive average PM figures.

Again, implementation may prove to be costly for the case of odometer measurement procedures. An alternative constrained optimal regulation is proposed by Nines (1996). A combination of taxes on gasoline and automobiles could be combined with a government fuel content standard. The fuel tax would be independent of individual automobiles, but the car tax would depend on auto characteristics (egg, power, size, style), fuel economy and abatement features.

Since mileage demand is highly correlated with automobile features, the automobile tax would also affect miles driven. Moreover, additional incentives could be created. In a dynamic setting, a car sale tax could be partially returned to consumers as incentive for scrapping older models according to the abbreviation of the cars useful life. For the previous mechanism, a subsidy for pollution control equipment is relatively simple to define since control equipment such as catalytic converters and filters are directly observable.

The same applies for fuel, insofar as that emissions will rise more or less proportionately with fuel consumption for a given vehicle and given driving conditions. On the other hand, a tax on car characteristics requires a erotic identification of the relationship between car characteristics and remembers. In general, market based instruments are difficult to implement and regulators wishing to apply them would have to combine tax schemes with technological and emission standards. This approach does not maximize social welfare by setting optimal levels of pollution.

Rather, the aim is to use pricing mechanisms to increase cost-effectiveness in achieving a certain standard compliance regarded as desirables. That is, once environmental goals are defined, economic instruments can reduce the social costs of achieving them. The rationale is rather simple. Since users face different marginal control cost schedules, pollution taxes varying directly with users’ pollution levels will make users adopt control levels up to the point where pollution control costs are equal, at the margin, to non-compliance tax costs.

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