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CREED Paper #34: The Environmental Effects of Tax Differentiation by Vehicle Characteristics: Results from Costa Rica

Author(s)Jaime Echeverría, Nick Johnstone, Ronald Mejías, Ina Porras
Serie(s)Creed Working Papers


Urban pollution, particularly from mobile sources, is a growing problem in Costa Rica, as elsewhere. Policymakers have tried to address this through traditional regulatory instruments, including the use of catalytic converters, compulsory vehicle inspection and maintenance programmes and random controls on roads. Yet other more general policy initiatives, such as reducing taxes, have contributed to greater car ownership and use, and hence pollution levels.

This study looks at differentiating car taxes on the basis of vehicle characteristics a means for improving air quality in Costa Rica. While the government already differentiates taxes by characteristic, this is not done explicitly for environmental reasons. Studies have demonstrated that a number of vehicle characteristics such as engine size, vehicle age and weight and other factors have a significant effect on emissions rates.

The results indicate that a tax which increases the relative price of used cars will have significant environmental impacts, while others means of differentiation (engine size and vehicle type) are much weaker. Moreover, since the present tax in Costa Rica is biased in favour of used cars, the case for ‘neutralising’ this bias on environmental grounds is likely to be stronger on efficiency grounds. However, as relatively poorer households have tended to buy smaller used cars, a change in the tax rate which increases their relative price is likely to be regressive. Yet applying taxes which favour the import of used cars is not the best way to achieve distributional objectives, particularly since the poorest are not likely to own a car of any sort.


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