For Ministries of Finance concerned with fiscal stability and broader macroeconomic outcomes, it is crucial to balance the economic benefits and fiscal challenges of decarbonizing road transportation.
Decarbonizing road transportation can yield significant economic benefits, e.g., through reducing congestion, accidents, air pollution, and energy costs, and through improving health outcomes. However, it can also erode important tax bases such as fuel excise taxes or duties on the usage or import of vehicles.
Key Messages
- Many existing studies on the fiscal impacts of decarbonizing road transportation consider the fiscal dimension in isolation. While fiscal considerations are important, this approach disregards the wider benefits to society. Moreover, existing studies do not quantify the incidence of tax reforms on households and firms, and thus they do not state whether the private sector would be better or worse off.
- Recent work by the IDB has assessed the financial, fiscal, and distributional impacts of road decarbonization in a single framework via Open Source Energy Modelling System (OSeMOSYS), a bottom-up energy model, augmented by a tax and a distributional impact module.
- OSeMOSYS starts from projected mobility demand (measured in passenger km/year) and freight demand (ton-km/year) based on assumed GDP and population scenarios and then calculates the cost to satisfy these demands using different means of transportation. The model accounts for capital costs, maintenance, and fuel expenses, and estimates the cost to deploy the needed infrastructure (e.g., bus lanes, charging stations).
- The model was applied to Costa Rica, which has a net zero by 2050 plan. Taxes on gasoline, diesel, vehicle ownership, and import duties make up 20% of its fiscal revenues.
- Empirical results include that between 2023 and 2050 decarbonizing transportation brings financial benefits to households and firms worth 1.49% of GDP, while the government faces a fiscal loss of 0.41% of GDP. The model can be used to show that there are many policy mixes that make up the lost revenue while leaving all groups of households and firms better off than without transportation decarbonization, though there is no single best strategy.
To develop robust fiscal strategies, Ministries of Finance in fossil-fuel-dependent countries should employ comprehensive scenario planning and modeling tools such as TIAM-UCL and BUEGO to help understand the potential impacts of different energy transition scenarios, or use alternative, simpler models. They can also draw inspiration from nations that have successfully diversified their economies, such as Dubai and Norway.