Air Pollution

Air pollution concentrations have been rapidly increasing in the major urban areas of Brazil caused mainly by

the increasing use of vehicles. Policies to control car emissions in Brazil have relied basically on mandatory

emission standards and subsidies for specific cleaner technology resulting in substantial decrease of car emission

rates. Nevertheless, taxes on car sales, differentiated by vehicles' size and fuel, have also influenced car

emission patterns. This paper analyses the compliance trend of the Brazilian fleet with environmental standards

between 1992 and 1997. 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 analyse 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.

Urban 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 Brazil's largest cities. In 1997 in Sгo Paulo, for example,

private cars were responsible for approximately 75% of carbon monoxide (CO), 73% of

hydrocarbons (HC), 23% of nitrogen oxides (NOx) 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 society2.

They also estimate the health costs associated with concentration levels in

excess of air pollution standards, finding a loss of approximately US$ 700 million per year in

the early 1990s.

Even when consumers can perceive individual emission damage, they are unable to reduce

alone the aggregate social emission costs. Consequently, their preferences will usually not

consider fuel and car cleanliness. In the presence of this negative externality, 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 Pigovian 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 Innes (1996), even if tamper-resistant emissionmeasurement

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 MBIs 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 FW), 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, FW consider emissions per gallon (EPG) and miles

per gallon (MPG) only to depend on si, the size of the car. Under these specific technological

conditions, FW propose a closed form solution for a fuel tax (tg) differing according to

characteristics of the vehicle at the pump.

The owner of car model i, would pay a tax given by

)( ) ( i i gi s MPG s EPM t : =

where :, represents the marginal social cost of a unit of emissions and EPG and MPG

represent car features. More generally, we could specify such a tax to be a function of other

car characteristics which are likely to affect EPG and MPG, 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