Healthy Climate, Healthy Bodies: Optimal Fuel Taxation and Physical Activity

Abstract

Transport has significant externalities including carbon emissions and air pollution. Public health research has identified additional social gains from active travel, due to health benefits of physical exercise. Per mile, these benefits greatly exceed the external costs from car use. We introduce active travel into an optimal fuel taxation model and analytically characterise the optimal second-best fuel tax. We find that accounting for active travel benefits increases the optimal fuel tax by 49% in the US and 36% in the UK. Fuel taxes should be implemented jointly with other policies aimed at increasing the uptake of active travel.

JEL Classification: H230, I120, Q530, Q540, Q580, R410, R480, Z280