This paper reviews the literature on the fiscal policy
instruments commonly used to reduce transport sector
externalities. The findings show that congestion charges
would reduce vehicle traffic by 9 to 12 percent and
significantly improve environmental quality. The vehicle
tax literature suggests that every 1 percent increase in
vehicle taxes would reduce vehicle miles by 0.22 to 0.45
percent and CO2 emissions by 0.19 percent. The fuel tax
is the most common fiscal policy instrument; however
its primary objective is to raise government revenues
rather than to reduce emissions and traffic congestion.
Although subsidizing public transportation is a common
practice, reducing emissions has not been the primary
objective of such subsidies. Nevertheless, it is shown that
transport sector emissions would be higher in the absence
of both public transportation subsidies and fuel taxation.
Subsidies are also the main policy tool for the promotion
of clean fuels and vehicles. Although some studies are
very critical of biofuel subsidies, the literature is mostly
supportive of clean vehicle subsidies