The long-run effects of congestion tolls, carbon tax, and land use regulations on urban CO2 emissions

Abstract

CO2 emissions caused by urban residents' energy consumption arise from 1) transportation and 2) housing energy consumption. This energy consumption depends on the spatial population distribution of the city. The current study quantitatively examines the effectiveness of i) congestion tolls, ii) carbon tax, and iii) land use regulations on the social welfare and the reduction of urban CO2 emissions. Results show that the congestion tolls can increase the social welfare by about 85% of the increase in the first-best scenario, which is the best result among the three policies, and can reduce CO2 emissions from commuting and housing energy by about 22% and 3%, respectively. These results suggest that congestion tolling, which is primarily the Pigovian tax for congestion, not only internalizes congestion externalities, but also effectively reduces CO2 emissions through downsizing commuting distances and housing sizes. Nevertheless, we show that because any spending, including consumption of goods, generates CO2, how tax revenues are used is important for determining total CO2.