## 1. Revenue from Energy and Environmental Taxes in Mauritius

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### Introduction: problem and scope
- Urban centers in developing countries face severe air pollution and traffic congestion; examples cited include Delhi, Cairo, Mexico City, Jakarta, and Beijing.
- Externalities addressed: local pollution, traffic congestion, and climate change — require corrective government action.
- Fiscal instruments are highlighted as often the most effective policy to address these externalities while mobilizing government revenue.
- Case focus: Mauritius as an illustrative case study of green tax reform options; Mauritius has implemented:
  - a form of carbon taxation,
  - substantial motor fuel taxes,
  - consideration of vehicle ownership tax reforms,
  - taxes reducing plastic bag use,
  - consideration of road pricing for Port Louis.
- Policy proposals previewed:
  - Enact an explicit tax on carbon dioxide (CO2) emissions.
  - Use a revenue-neutral "feebate" to increase fuel economy cost-effectively, combined with an excise tax on vehicle sales prices to meet revenue and equity objectives.
  - Convert the road tax into a tax on annual kilometers driven to transition to a GPS-based pricing system with tolls varying by region and time of day according to congestion severity.
- Contextual statistics for Mauritius:
  - Population: 1.3 million.
  - Per capita income (Purchasing Power Parity): approximately US$13,000 (World Bank, 2009).

### Conceptual case for environmental taxes
- Rationale and advantages:
  - Taxes internalize externalities from CO2, local emissions, and congestion by adjusting prices faced by households and firms.
  - Well-designed taxes exploit multiple behavioral responses (fuel switching, reduced energy use, adoption of energy-efficient products).
- Comparisons with other instruments:
  - Regulatory approaches exploit fewer behavioral margins.
  - Cap-and-trade drawbacks: may not raise revenue if allowances are given away; price volatility can deter investment.
  - Green taxes can provide more stable price signals for long-term investment, assuming policy credibility.
- Practical design considerations:
  - Tax CO2 across transport, power, residential, industrial sectors; tax emissions causing same damage at same rate.
  - Revenue use matters: productive use (e.g., cutting distortionary taxes or funding high-benefit projects) preserves green-tax effectiveness.
  - Distributional concerns: compensate poor households via targeted assistance rather than holding energy prices artificially low.
- Complementary policies:
  - Generally unnecessary if markets function well and taxes are set appropriately.
  - May be warranted where market impediments exist (information programs, transitory incentives for nascent technologies).
- Implementation notes:
  - Fiscal instruments often straightforward (tax fossil fuels at entry point, meter industrial emissions).
  - Exceptions: vehicle tailpipe emissions hard to monitor — use fuel taxes combined with emissions-per-mile regulations.

### Assessment of green tax options for Mauritius — key statistics and fiscal importance
- Fiscal year 2008/09 revenue importance:
  - Fuel excise taxes raised Rs 2,213 million (including Rs 239 million from the Maurice Ile Durable levy), equal to 4.7 percent of total tax collections.
  - Vehicle excise taxes (excluding registration fees and road taxes) raised Rs 1,852 million, equal to 3.9 percent of total tax collections.
- Other environmentally-related tax receipts in 2008/09:
  - Excise taxes on plastic products, an "environmental protection fee", and a "solidarity levy" each contributed 0.2– 0.3 percent to total tax revenue.
  - A "passenger fee" also contributed (exact share not specified in supplied excerpt).
- IMF (2008) illustrative estimate preserved: a $30 per ton tax on CO2 emissions in 2020 would raise revenues equal to almost 4 percent of GDP in Eastern European countries, and around 2.5 percent of GDP in Africa, China, and India.
- Policy design principle: tax CO2 emissions consistently across sources to achieve cost-effective abatement.

### Policy recommendations and reform options
- Carbon taxation:
  - Enact an explicit CO2 tax to internalize greenhouse gas externalities.
- Vehicle taxation and fuel economy:
  - Implement a revenue-neutral feebate:
    - Tax CO2 emissions per kilometer in proportion to excess over the average CO2 per kilometer for the new vehicle fleet.
    - Provide rebate for vehicles with below-average CO2 per kilometer.
  - Combine feebate with an excise tax on vehicle sales prices to meet revenue and equity objectives.
- Congestion and road-use charging:
  - Convert the road tax into a tax on annual kilometers driven as a transitional step.
  - Progressively transition to a GPS-based pricing system where tolls vary across region and time of day according to congestion severity.
- Fuel taxes:
  - Maintain and possibly reform existing excise taxes on petroleum products; fuel excise taxes are already substantial in Mauritius.
- Complementary measures:
  - Use complementary policies only where market failures prevent efficient responses (e.g., better transit, information programs, targeted incentives).

### Detailed empirical findings and estimates

A. Climate Change and the Maurice Ile Durable (MID)
- Energy-related CO2 emissions per capita: 3.6 tons in 2008, compared with 0.9 tons in 1980.
- MID levy established July 2008 to finance clean energy projects.
- For 2011 the MID levy was doubled to:
  - Rs 0.30 per kilogram for coal (or US$0.01 per kilogram using Rs 30 per US$1),
  - Rs 0.30 per kilogram of liquefied petroleum gas (LPG),
  - Rs 0.30 per liter for other petroleum products.
- Price impacts (relative to 2009 prices):
  - Coal: 9.4 percent,
  - Fuel oil: 1.8 percent,
  - Other fuel prices: roughly 1 percent.
- MID projected revenue for 2011: Rs 577 million.
- Converting MID into an explicit carbon tax:
  - Tax rate required to maintain projected MID revenues: approximately Rs 118 per ton of CO2.
- Recommended carbon-tax scale using PPP:
  - Recommended carbon tax (approximately): Rs 360 per ton (using PPP rate Rs 18 to US$1).
  - Alternative market-exchange conversion would imply approximately Rs 600 per ton.
- Comparison benchmarks:
  - U.S. inter-agency recommended social cost of carbon for 2010: US$21 rising about 2 to 3 percent a year in real terms.
  - Price of CO2 in the ETS: currently equivalent to about US$20 per ton.
- Emissions context:
  - Total CO2 emissions in Mauritius: 3.4 million metric tonnes in 2009.
  - Sector shares: 59 percent from fuel combustion in power generation, 25 percent from transportation, 10 percent from manufacturing.
  - Power generation mix in 2008: coal 48.3 percent, fuel oil 20.5 percent, bagasse 26.5 percent, hydro 4.2 percent.
  - Constraints to abatement: natural gas, nuclear, additional bagasse/hydro, and carbon capture/storage are infeasible or limited.

B. Preliminary assessment of automobile externalities (per kilometer)
- Local pollution: Rs 0.08 per kilometer.
- Global warming (CO2): Rs 0.06 per kilometer (using Rs 360 per ton CO2, gasoline CO2 coefficient 0.0023 tonnes per liter, fuel economy 13 kilometers per liter).
- Traffic congestion:
  - Nation-wide average marginal congestion cost: Rs 2.1 per kilometer.
  - Peak driving in Port Louis marginal congestion cost: Rs 12 per kilometer.
- External accident cost estimate: Rs 0.8 per kilometer for the average vehicle.
- Summary comparison (external costs per km):
  - Local pollution: Rs 0.08
  - Global warming: Rs 0.06
  - Traffic congestion: Rs 2.10
  - Accidents: Rs 0.80
- Key conclusion: congestion is the largest automobile externality (external costs per kilometer driven are 15 times the combined local pollution and CO2 costs).

C. Fuel tax evaluation (components and totals)
- Current excise tax on gasoline (after 10 percent increase in 2011 budget): Rs 10.8 per liter.
- Effective gasoline tax components and total:
  - Excise: Rs 10.80 per liter,
  - MID: Rs 0.30 per liter,
  - Contribution to road development: Rs 1.85 per liter,
  - Hedging: Rs 3.00 per liter,
  - Contribution to subsidy for LPG, flour, and rice: Rs 1.50 per liter,
  - Contribution to administration of State Trading Corporation: Rs 0.35 per liter,
  - Total effective gasoline tax: Rs 17.80 per liter.
- Effective diesel tax components and total:
  - Excise: Rs 3.30 per liter,
  - MID: Rs 0.30 per liter,
  - Contribution to road development: Rs 1.75 per liter,
  - Hedging: Rs 3.00 per liter,
  - Contribution to subsidy for LPG, flour, and rice: Rs 1.50 per liter,
  - Contribution to administration of State Trading Corporation: Rs 0.40 per liter,
  - Total effective diesel tax: Rs 10.25 per liter.
- International context: Mauritius fuel taxes higher than United States and Canada but lower than some European countries (taxes compared using market exchange rates).
- Suitability of fuel taxes:
  - Poor targeting of congestion and accidents (same tax irrespective of urban/rural, peak/off-peak).
  - Behavioral response mainly via fuel economy improvements, which do not reduce congestion or accidents.
- Optimal gasoline tax estimate (tentative): Rs 15.6 per liter (about Rs 2.5 below current effective gasoline tax of Rs 17.8 per liter).
- Diesel tax assessment: insufficient data; lower diesel taxes may be efficient due to rural/agricultural concentration of diesel use.

D. Tax policies to reduce traffic congestion
- Long-run efficient instrument:
  - GPS-based per-kilometer tolling with time-varying charges to reflect congestion externality (TRB, 2006).
  - Encourages modal shift, time-shifting, carpooling, trip reduction, job relocation.
  - Privacy concerns require strict legal limits on information collection.
  - Precedents: GPS-based truck tolling in Germany; studies in United Kingdom and Holland for cars.
- Near-term practical approach for Port Louis:
  - Cordon toll around downtown; electronic charging when passing cordon points.
  - Peak-period cordon toll should reflect marginal external cost per kilometer (Rs 12) times average trip distance of tolled area.
  - Limitations: cordon toll charges do not vary by distance inside cordon; can cause rerouting and spillovers.
  - Evidence: Singapore, London, and Stockholm experienced reductions in congestion with cordon/pricing schemes.
- Complementary measures:
  - Light rail and a ring road may help but are insufficient without pricing to address congestion externality.

### Box 1 — International experience with congestion pricing (selected empirical points)
- Singapore:
  - Area license introduced in 1975; electronic tolls introduced in 1998.
  - Objective: maintain average speed 30–40 miles per hour on expressways and 12–18 miles per hour on major roads.
  - Charges adjusted in 30-minute steps during peak periods.
- London:
  - Charging zone: 15 square mile; charge applies between 7:00 a.m. and 6:00 p.m. on weekdays.
  - Daily congestion charge: £8 (Rs 400); penalty for nonpayment: £60 or more.
  - Operating costs: about £100 million (Rs 5,000 million) per year.
  - Net economic benefits: estimated at about £150 million (Rs 7,500) per year.
  - Congestion reduction: 30 percent reduction in first two years within priced zone.
- Stockholm:
  - Cordon toll introduced 2007; cordon covers about 36 square kilometer.
  - Fee varies SEK 10–20 (Rs 45 or 90); annual net benefits around SEK 654 (Rs 2,800) million.
- United States:
  - Limited momentum; examples include HOV-to-toll conversions (I-15 San Diego) and toll-funded infrastructure (SR-91 Orange County).

### Vehicle ownership taxes — current system, deficiencies, and alternatives
- Current (2009) taxes:
  - One-off excise duty on vehicle purchase:
    - Engine capacity, cc <1,600: 55%
    - Engine capacity, cc >1,600: 100%
  - One-off registration fee (first registration) by engine capacity, cc:
    - <1,000: Rs 12,500
    - 1,001–1,250: Rs 25,000
    - 1,251–1,500: Rs 40,000
    - 1,501–1,600: Rs 50,000
    - 1,601–1,750: Rs 60,000
    - 1,751–2,000: Rs 90,000
    - 2,001–2,500: Rs 120,000
    - >2,500: Rs 150,000
  - Annual road tax by engine capacity, cc:
    - <1,250: Rs 3,500
    - 1,251–1,600: Rs 4,000
    - 1,601–1,850: Rs 8,500
    - 1,851–2,250: Rs 10,500
    - >2,250: Rs 13,000
- Deficiencies:
  - Weak incentives to reduce vehicle miles driven and to improve fuel economy.
  - One-off taxes slow fleet turnover and encourage retention of older, more polluting vehicles.
  - Complexity for consumers; potential conflict with uniform CO2 pricing.
- Alternative options:
  - Graduated taxes on certified CO2 per kilometer: promote broader fuel-economy improvements but violate uniform CO2 pricing and do not reduce driving.
  - Proportional tax on CO2 per kilometer: cost-effective across vehicle types but can be highly regressive (example rates below).
  - Feebate combined with excise tax:
    - Feebate formula: fee or rebate = t × (CO2 per km – pivot point).
    - Illustration using 2010 data: feebate at Rs 1,700 per grams CO2 per kilometer with pivot point 147 grams CO2 per km combined with proportional excise of 66 percent approximately maintains average revenue per vehicle and yields a progressive tax structure (tax rates rise from 33 percent for low-price vehicles to 79 percent for high-price vehicles).
  - Transition to mileage tolls and GPS-based nationwide tolling:
    - Convert annual road tax into charge = congestion charge per kilometer × kilometers driven in previous year (odometer readings).
    - Offer lower toll rates to drivers who install GPS and demonstrate rural/off-peak driving.
    - Set per-kilometer charge to maintain prior total road tax revenue divided by projected total car mileage.
  - Insurance reform — Pay-As-You-Drive (PAYD):
    - Insurance payment = fee per kilometer × annual kilometers driven, scaled by driver rating factors.
    - Advantages: discourages driving without imposing new net burden if replacing lump-sum premiums; low-mileage drivers benefit.
    - Oregon example: one-off tax credit US$100 (Rs 3,000) to sign up; if 2 percent of motorists switch each year, annual government revenue loss ~ Rs 15 million (illustrative).
  - Other green-tax possibilities: waste management pay-by-the-bag, deposit-refund systems for batteries/tires/electronics, fisheries extraction charges, LPG subsidy reform, water tariffs, and targeted taxation of stationary source emissions where appropriate.

*Source: IMF working paper chapter "1. Revenue from Energy and Environmental Taxes in Mauritius" (excerpt).*

### 1. Revenue from Energy and Environmental Taxes in Mauritius, ..........................................10

### 1. Revenue from Energy and Environmental Taxes in Mauritius

### Introduction: problem and scope
- Urban centers in developing countries face severe air pollution and traffic congestion; examples cited include Delhi, Cairo, Mexico City, Jakarta, and Beijing (Figure 1).
- Local pollution, traffic congestion, and climate change are externality problems requiring corrective government action.
- Fiscal instruments are highlighted as often the most effective policy to address these externalities while mobilizing government revenue.

- Case focus: Mauritius as an illustrative case study of green tax reform options.
  - Mauritius has implemented innovative taxes: a form of carbon taxation, substantial motor fuel taxes, consideration of vehicle ownership tax reforms, taxes reducing plastic bag use, and consideration of road pricing for Port Louis.
  - Purpose: assess existing and proposed tax reforms in Mauritius with focus on carbon taxation, congestion taxation, fuel taxes, and vehicle ownership tax reform.

- Policy proposals previewed:
  - Enact an explicit tax on carbon dioxide (CO2) emissions.
  - Use a revenue-neutral "feebate" to increase fuel economy cost-effectively, combined with an excise tax on vehicle sales prices to meet revenue and equity objectives.
  - Convert the road tax into a tax on annual kilometers driven to transition to a GPS-based pricing system with tolls varying by region and time of day according to congestion severity.
  - Note: taxation of local power plant emissions is not considered here due to coastal location and prevailing wind patterns making their contribution to pollution exposure relatively minor.

- Contextual statistics for Mauritius:
  - Population: 1.3 million.
  - Per capita income (Purchasing Power Parity): approximately US$13,000 (World Bank, 2009).

### Conceptual case for environmental taxes
- Rationale:
  - Production and use of certain goods produce externalities (e.g., CO2 and local harmful emissions from fossil fuel combustion; traffic congestion delays others).
  - Fiscal instruments can internalize externalities by adjusting prices faced by households and firms.
  - Well-designed taxes can exploit multiple behavioral responses across the economy (fuel switching, reduced energy use, adoption of energy-efficient products).

- Comparisons with other instruments:
  - Regulatory approaches are generally less effective because they exploit fewer behavioral responses (example: energy efficiency standards exploit only product efficiency response).
  - Cap-and-trade alternatives:
    - Cap-and-trade may not raise revenue if allowances are given away for free.
    - Price volatility in allowance markets can cause inconsistent abatement and deter investment.
    - Green taxes can provide more stable price signals for long-term investment, assuming policy credibility.

- Practical design considerations:
  - Taxes should cover all sources causing the same damage (e.g., CO2 across transport, power, residential, industrial sectors) and tax emissions causing the same damage at the same rate.
  - Revenue use matters: green taxes are undermined if revenues are not used productively (e.g., to cut other distortionary taxes or fund high-benefit projects).
  - Distributional concerns: compensation for poor households (who spend a larger share of budgets on energy) may be required via targeted assistance rather than holding energy prices artificially low.

- Complementary policies:
  - Generally unnecessary if markets work well and taxes are set appropriately.
  - May be warranted where market impediments exist (e.g., information programs if consumers under-invest or misperceive energy efficiency, transitory incentives for nascent technologies with spillovers).
  - Careful case-by-case evaluation recommended; typically the largest net benefits come from the tax itself rather than supplementary instruments.

- Implementation notes:
  - Fiscal instruments are typically straightforward to implement (e.g., taxing fossil fuels at entry point, metering industrial emissions).
  - Exceptions: vehicle tailpipe emissions are numerous and hard to monitor; alternatives include fuel taxes combined with emissions-per-mile regulations.

### Assessment of green tax options for Mauritius (key findings and statistics)
- Revenue importance of fuel and vehicle taxes in Mauritius (fiscal year 2008/09):
  - Fuel excise taxes raised Rs 2,213 million (including Rs 239 million from the Maurice Ile Durable levy), equal to 4.7 percent of total tax collections.
  - Vehicle excise taxes (excluding registration fees and road taxes) raised Rs 1,852 million, equal to 3.9 percent of total tax collections.

- Other environmentally-related tax receipts in Mauritius (2008/09):
  - Excise taxes on plastic products (bottles, bags, and cans), an "environmental protection fee" (hotels, guest houses, tourist residences), and a "solidarity levy" each contributed 0.2– 0.3 percent to total tax revenue.
  - A "passenger fee" also contributed to revenue (exact share not specified in supplied excerpt).

- International and comparative points preserved from conceptual discussion:
  - IMF (2008) illustrative estimate: a $30 per ton tax on CO2 emissions in 2020 would raise revenues equal to almost 4 percent of GDP in Eastern European countries, and around 2.5 percent of GDP in Africa, China, and India.
  - Policy design principle: tax CO2 emissions consistently across sources to achieve cost-effective abatement.

### Policy recommendations and reform options presented
- Carbon taxation:
  - Enact an explicit CO2 tax to internalize greenhouse gas externalities.

- Vehicle taxation and fuel economy:
  - Implement a revenue-neutral feebate:
    - Tax CO2 emissions per kilometer of vehicles in proportion to the excess over the average CO2 per kilometer for the new vehicle fleet.
    - Provide corresponding rebate/subsidy for vehicles with below-average CO2 per kilometer.
  - Combine feebate with an excise tax on vehicle sales prices to meet revenue and equity objectives.

- Congestion and road-use charging:
  - Convert the existing road tax into a tax on annual kilometers driven as a transitional step.
  - Initiate a progressive transition to a GPS-based pricing system where tolls vary across region and time of day according to congestion severity.
  - Note: congestion pricing experiences in Singapore, London, and Stockholm are referenced as precedents; Box 1 in source provides further experience (not reproduced here).

- Fuel taxes:
  - Maintain and possibly reform existing excise taxes on petroleum products as an instrument for addressing local pollution, congestion, and CO2 emissions; recognize fuel excise taxes are already substantial in Mauritius.

### Other salient observations
- Existing taxes on vehicles and motor fuels are described as "blunt instruments" for congestion because they do not vary by region, time of day, or the congestion level of the specific roads where driving occurs.
- Vehicle taxes have limited effects on pollution intensity because they do not reduce intensity of vehicle use and may weakly incentivize higher fuel economy.
- Suggested approach emphasizes least-cost, economy-wide behavioral responses and careful use of complementary policies only where market failures prevent efficient responses.

*Source: IMF working paper chapter "1. Revenue from Energy and Environmental Taxes in Mauritius" (excerpt).*

### 1.2 percent to total tax revenues.

### 1.2 percent to total tax revenues.

### A. Climate Change and the Maurice Ile Durable (MID)
- Energy-related CO2 emissions per capita: 3.6 tons in 2008, compared with 0.9 tons in 1980.
- MID levy established July 2008 to finance clean energy projects (e.g., subsidies for compact fluorescent lamps and solar water heaters).
- For 2011 the MID levy was doubled to:
  - Rs 0.30 per kilogram for coal (or US$0.01 per kilogram using Rs 30 per US$1),
  - Rs 0.30 per kilogram of liquefied petroleum gas (LPG),
  - Rs 0.30 per liter for other petroleum products.
- Price impacts (relative to 2009 prices):
  - Coal: 9.4 percent,
  - Fuel oil: 1.8 percent,
  - Other fuel prices: roughly 1 percent.
- MID projected revenue for 2011: Rs 577 million.
- Converting MID into an explicit carbon tax:
  - Tax rate required to maintain projected MID revenues: approximately Rs 118 per ton of CO2.
  - Pattern of fuel taxes implied by Rs 118/ton CO2 is extremely close to current MID structure.
- Recommended carbon-tax scale using PPP:
  - Recommended carbon tax (approximately): Rs 360 per ton (using PPP rate Rs 18 to US$1).
  - Alternative market-exchange conversion would imply approximately Rs 600 per ton.
- Comparison benchmarks:
  - U.S. inter-agency recommended social cost of carbon for 2010: US$21 rising about 2 to 3 percent a year in real terms.
  - Price of CO2 in the ETS: currently equivalent to about US$20 per ton.
- Emissions context and limited abatement opportunities:
  - Total CO2 emissions in Mauritius: 3.4 million metric tonnes in 2009.
  - Sector shares: 59 percent from fuel combustion in power generation, 25 percent from transportation, 10 percent from manufacturing.
  - Power generation mix in 2008: coal 48.3 percent, fuel oil 20.5 percent, bagasse 26.5 percent, hydro 4.2 percent.
  - Constraints: shifting from coal to imported natural gas not feasible; nuclear generation would greatly exceed demand; bagasse and hydro near capacity; carbon capture and storage ruled out by volcanic rock geology.

### B. Preliminary Assessment of Automobile Externalities
- Local pollution damage estimate (ballpark): Rs 0.08 per kilometer.
  - Based on extrapolation of U.S. estimates via PPP and adjustments for willingness to pay and emission rates.
- Global warming (CO2) damage per kilometer:
  - CO2 damage used: Rs 360 per ton,
  - Gasoline CO2 coefficient: 0.0023 tonnes per liter,
  - Fuel economy: 13 kilometers per liter,
  - Implied global-warming damage: Rs 0.06 per kilometer.
- Marginal congestion cost estimates:
  - Nation-wide average marginal congestion cost: Rs 2.1 per kilometer.
  - Peak driving in Port Louis marginal congestion cost: Rs 12 per kilometer.
- External accident cost estimate: Rs 0.8 per kilometer for the average vehicle (dominated by fatality risks).
- Summary comparison (external costs per km):
  - Local pollution: Rs 0.08
  - Global warming: Rs 0.06
  - Traffic congestion: Rs 2.10
  - Accidents: Rs 0.80
- Key conclusion: congestion is the largest automobile externality (external costs per kilometer driven are 15 times the combined local pollution and CO2 costs).

### C. Fuel Tax Evaluation
- Current excise tax on gasoline (after 10 percent increase in 2011 budget): Rs 10.8 per liter.
- Effective taxes on gasoline (components and totals):
  - Excise: Rs 10.80 per liter,
  - MID: Rs 0.30 per liter,
  - Contribution to road development: Rs 1.85 per liter,
  - Hedging: Rs 3.00 per liter,
  - Contribution to subsidy for LPG, flour, and rice: Rs 1.50 per liter,
  - Contribution to administration of State Trading Corporation: Rs 0.35 per liter,
  - Total effective gasoline tax: Rs 17.80 per liter.
- Effective diesel tax breakdown and total:
  - Excise: Rs 3.30 per liter,
  - MID: Rs 0.30 per liter,
  - Contribution to road development: Rs 1.75 per liter,
  - Hedging: Rs 3.00 per liter,
  - Contribution to subsidy for LPG, flour, and rice: Rs 1.50 per liter,
  - Contribution to administration of State Trading Corporation: Rs 0.40 per liter,
  - Total effective diesel tax: Rs 10.25 per liter.
- International context: Mauritius fuel taxes are much higher than United States and Canada but lower than some European countries (taxes compared using market exchange rates).
- Suitability of fuel taxes:
  - Fuel taxes poorly target congestion and accidents (same tax irrespective of urban/rural, peak/off-peak, or collision risk).
  - Behavioral response to fuel taxes heavily via fuel economy improvements, which do not reduce congestion or accidents.
- Optimal gasoline tax estimate (tentative): Rs 15.6 per liter.
  - This is about Rs 2.5 below the current effective gasoline tax of Rs 17.8 per liter.
- Diesel tax assessment: lack of data prevents assessment; lower diesel taxes than gasoline may be efficient because diesel use is concentrated in rural/agricultural vehicles and buses which may reduce congestion.

### D. Tax Policies to Reduce Traffic Congestion
- Road expansion limitations:
  - Port Louis is very built-up; further road expansion partly self-defeating (induces additional driving).
- Long-run efficient instrument:
  - GPS-based per-kilometer tolling with time-varying (rush-hour) per-kilometer charges to reflect congestion externality (TRB, 2006).
  - Benefits: encourages modal shift, time-shifting of trips, carpooling, trip reduction, job relocation, and optimal use of road network.
  - Privacy concerns require strict legal requirements on information-collection agencies.
  - Examples: GPS-based truck tolling introduced in Germany; serious studies in United Kingdom and Holland for cars.
- Near-term practical approach for Port Louis:
  - Cordon toll around downtown center (electronic charging when passing cordon points).
  - Peak-period cordon toll should reflect marginal external cost per kilometer (Rs 12) times average trip distance (in and out) of the tolled area.
  - Cordon-pricing limitations: same fee regardless of distance traveled inside cordon; can exacerbate congestion elsewhere as drivers reroute.
  - Evidence: cordon/pricing schemes in Singapore, London, and Stockholm have been reasonably successful.
- Complementary measures:
  - Building light rail system and a ring road may make sense but are insufficient alone without a price on road usage to address congestion externality.

*Source: IMF staff chapter on Mauritius green taxes and transport externalities (pages excerpted).*

### Box 1. Experience with Congestion Pricing in other Countries

### Box 1. Experience with Congestion Pricing in other Countries

### International experience with congestion pricing
- Singapore:
  - Introduced area license (day-pass) in 1975; dramatically reduced congestion inside zone but initially increased congestion outside the zone.
  - Supplementary tolls on major roads leading up to the restricted zone addressed spillovers.
  - In 1998 replaced area licensing with an electronic toll debited from smart cards on certain links.
  - Objective: maintain average speed of 30–40 miles per hour on expressways and 12–18 miles per hour on major roads.
  - Charges rise and fall in 30-minute steps during peak periods based on congestion observed in the previous quarter.
- Norway:
  - Experimented with cordon tolling; little effect on congestion because stated objective was raising transportation revenue rather than deterring congestion.
- London:
  - Area licensing scheme introduced in 2003 and extended to the west in 2007.
  - Charging zone: 15 square mile; charge applies between 7:00 a.m. and 6:00 p.m. on weekdays.
  - Daily congestion charge: £8 (Rs 400).
  - Enforcement: video cameras recording license plates; unpaid drivers mailed a penalty amounting to £60 or more.
  - Congestion reduction: 30 percent reduction in the first two years within the priced zone (defined by difference between observed and free-flow travel rate), without causing excessive congestion elsewhere.
  - Modal shift: at least half of diverted auto trips switched to mass transit; about a quarter were diverted to other roads.
  - By 2008 average speeds had fallen back to pre-charging levels due to increased traffic from exempt vehicles and diversion of some road space to buses, pedestrians, and cyclists.
  - Operating costs: about £100 million (Rs 5,000 million) per year.
  - Net economic benefits: estimated at about £150 million (Rs 7,500) per year.
  - Vehicle exemptions reduce program efficiency but aid public and political acceptability.
- Stockholm:
  - Implemented cordon toll in 2007 covering about 36 square kilometer; enforcement via number plate recognition.
  - Fee for passing cordon during charging hours varies across time of day from between SEK 10 and 20 (Rs 45 or 90); some vehicle exemptions (e.g., emergency vehicles, buses, motorcycles, alternative fuel vehicles).
  - Congestion effects: initially dropped by 50 percent on main routes approaching city center and 20 percent within city center; some deterioration recently.
  - Annual net benefits: around SEK 654 (Rs 2,800) million.
- United States:
  - Limited momentum: federal funding for pilot schemes under the Value Pricing Program and reduction of regulatory obstacles to freeway pricing.
  - Examples:
    - Opening High-Occupancy Vehicle (HOV) lanes to single-occupant vehicles in exchange for a fee (e.g., I-15 in San Diego).
    - Using tolls to fund new infrastructure (e.g., lanes opened on SR-91 in Orange County California in 1995).

### Design principles and complementary measures
- Time-varying and directionally-differentiated tolls:
  - Toll should rise and fall progressively during the rush hour to encourage departures before or after peak and "flatten" trip departure patterns.
  - Toll should vary with driving direction; tolls for reverse commutes should be lower.
- Complementary measures to enhance effectiveness:
  - Better transit options.
  - Provision of bike routes.
  - Incentives for employers to offer flexible work hours and to re-locate away from downtown areas.

### Vehicle ownership taxes in Mauritius — current system and deficiencies
- Current taxes (2009 summary; details in Table 5):
  - One-off excise duty on vehicle purchase:
    - Engine capacity, cc <1,600: 55%
    - Engine capacity, cc >1,600: 100%
  - One-off registration fee (for first registration) by engine capacity, cc:
    - <1,000: Rs 12,500
    - 1,001–1,250: Rs 25,000
    - 1,251–1,500: Rs 40,000
    - 1,501–1,600: Rs 50,000
    - 1,601–1,750: Rs 60,000
    - 1,751–2,000: Rs 90,000
    - 2,001–2,500: Rs 120,000
    - >2,500: Rs 150,000
  - Annual road tax by engine capacity, cc:
    - <1,250: Rs 3,500
    - 1,251–1,600: Rs 4,000
    - 1,601–1,850: Rs 8,500
    - 1,851–2,250: Rs 10,500
    - >2,250: Rs 13,000
- Identified deficiencies:
  - Weak incentives to reduce vehicle miles driven; vehicle taxes reduce vehicle ownership but do not incentivize driving less (vehicle taxes exploit perhaps only about a third of the reduction in driving that would be forthcoming under equivalently scaled taxes on fuel or vehicle miles).
  - Weak incentives to improve fuel economy or reduce CO2 per kilometer; engine size does not reliably capture fuel economy improvements and taxes do not reward attributes like lighter materials, fuel injection, reduced rolling resistance, smaller cabin size, and better aerodynamics.
  - One-off taxes slow fleet turnover, encouraging retention of older, more polluting vehicles.
  - Complexity: consumers find it difficult to understand lifetime tax implications.
  - Potential conflict with uniform CO2 pricing across sectors if ownership taxes aim to reduce CO2 per kilometer while fuel taxes already provide ongoing incentives.

### Alternative tax and incentive options for Mauritius
- Graduated taxes on CO2 per kilometer:
  - Excise taxes on certified CO2 per kilometer with tax rate starting low/zero and increasing in steps with higher CO2 per kilometer.
  - Advantage: promotes a broader set of fuel-economy improvements than engine-size-based taxes.
  - Drawbacks:
    - Violates uniform CO2 pricing across sources; may place too much burden on shifting to small vehicles rather than other cost-effective reductions.
    - Does not incentivize driving less; evidence suggests people drive more when vehicle fuel economy is greater.
    - Complexity: combining multiple tax schedules complicates consumer decision-making.
    - Potential for substantial revenue decline as consumers choose low-CO2 vehicles unless rates are adjusted.
- Proportional tax on CO2 per kilometer:
  - Tax proportional to CO2 emissions per kilometer promotes cost-effectiveness by providing the same reward for the last ton of CO2 reduced across vehicle types.
  - Drawback: changes progressivity of tax system; CO2 per kilometer tends to increase by less than proportionate to vehicle price, so taxes as percentage of price fall for more expensive vehicles.
  - Illustration: maintaining same average revenue per vehicle would require a tax rate of Rs 1,700 per grams of CO2 per kilometer; system becomes highly regressive (average tax paid per vehicle falls from 89 percent for lowest-price vehicles to 28 percent for most expensive).
  - Implicit CO2 price example: assuming average car driven 10,000 kilometers a year for 15 years, implicit CO2 price is Rs 11,333 per ton.
- Feebate combined with excise tax:
  - Feebate formula: fee or rebate = t × (CO2 per km – pivot point), where pivot point denotes threshold CO2 per km and t is tax rate per gram CO2/km.
  - Revenue neutrality: pivot point set at expected average rate across vehicle purchases; pivot can be reduced over time as average CO2 per km declines.
  - Revenues maintained by applying a uniform (or graduated) percentage tax to purchase price of all vehicles.
  - Illustration using 2010 data:
    - Feebate at Rs 1,700 per gram CO2 per kilometer with pivot point 147 grams CO2 per km (average emission rate) combined with a proportional excise tax of 66 percent approximately maintains average revenue per vehicle.
    - Result: feebate-excise combination is progressive; tax rates rise from 33 percent for low-price vehicles to 79 percent for high-price vehicles.
- Transitioning to mileage tolls and GPS-based nationwide tolling:
  - Convert annual road tax into a variable charge: annual road tax = congestion charge per kilometer × kilometers driven in previous year.
  - Kilometers recorded by yearly odometer readings (e.g., during safety inspections or when used vehicles are sold).
  - Progressive transition to GPS-based charging by offering lower toll rates to drivers who install GPS and demonstrate predominantly rural or off-peak driving.
  - Revenue maintenance: set per-kilometer charge equal to total road tax revenue last year divided by projected total car mileage under new scheme.
  - Note on odometer tampering: tampering difficult without traces; stiff fines and building a history of readings make fraud detection easier.
- Insurance reform — Pay-As-You-Drive (PAYD):
  - Under PAYD, insurance payment = fee per kilometer × annual kilometers driven, scaled by driver rating factors (age, crash record, vehicle characteristics).
  - Advantages:
    - Discourages driving without imposing a new tax burden on motorists because per-kilometer insurance replaces lump-sum premium and average motorist may be no worse off.
    - Low-mileage drivers benefit with lower annual premiums.
    - Can be voluntary and phased in; insurance companies can offer PAYD alongside conventional plans.
    - Encourages high crash-risk drivers to reduce driving most.
  - Example: Oregon offered one-off tax credit of US$100 (Rs 3,000) for each motorist that signed up for PAYD; if 2 percent of motorists switch each year, annual government revenue loss would be modest at around Rs 15 million.
- Other green tax possibilities:
  - Waste management:
    - Pay-by-the-bag schemes used in about 25 percent of U.S. households; incentivize waste reduction and recycling but risk illegal dumping if enforcement weak.
    - Deposit-refund systems for hazardous items (batteries, tires, used electronics) to encourage safe disposal; portion of existing tax on tires and batteries could be rebated upon return.
  - Fisheries:
    - Market-based charges for fish extraction (as in New Zealand) to address overfishing rather than gear or season restrictions.
  - LPG subsidy reform:
    - Scaling back large subsidy for LPG (used in domestic cooking and water heating) would advantage clean solar water heaters and remove contradiction where LPG is taxed under MID levy but subsidized simultaneously.
    - Targeted compensation for low-income groups would be needed.
  - Water tariffs:
    - Tariffs currently recover operating costs but not investment/upgrades; increased tariffs, especially during scarcity, would encourage conservation and help fund capacity improvements (replacement of leaky pipes, new dams).
    - Competitive bidding could allow private companies to recover large upfront costs through tariffs.
  - Stationary source emissions:
    - European countries have taxed SO2 and NOx; U.S. cap-and-trade program for SO2 delivered large human health benefits.
    - For Mauritius, taxing power plant SO2 emissions appears unnecessary: emissions are subject to performance standards and disperse quickly given wind patterns and coastal power plant locations.

### Key calculations and empirical estimates (selected)
- Singapore: target speeds 30–40 miles per hour (expressways) and 12–18 miles per hour (major roads); 30-minute charge adjustments.
- London:
  - Charging zone: 15 square mile; charge hours 7:00 a.m. to 6:00 p.m. weekdays.
  - Daily charge: £8 (Rs 400); penalty for nonpayment: £60 or more.
  - Operating costs: about £100 million (Rs 5,000 million) per year.
  - Net economic benefits: about £150 million (Rs 7,500) per year.
- Stockholm: cordon area about 36 square kilometer; fees SEK 10–20 (Rs 45 or 90); annual net benefits around SEK 654 (Rs 2,800) million.
- Mauritius vehicle tax parameters (2009):
  - Excise duty: 55% (<1,600 cc) or 100% (>1,600 cc).
  - Registration fees: Rs 12,500 up to Rs 150,000 by engine size bands (see list above).
  - Annual road tax: Rs 3,500 to Rs 13,000 by engine size bands (see list above).
- Progressivity illustration (2010 vehicle database summary):
  - Proportional CO2 per km tax to maintain average revenue implies tax rate of Rs 1,700 per grams of CO2 per kilometer.
  - Under this proportional CO2 tax the average tax paid per vehicle falls from 89 percent (lowest-price vehicles) to 28 percent (most expensive).
  - Feebate combined with 66% proportional excise:
    - Pivot point: 147 grams CO2 per kilometer.
    - Feebate-excise combination yields tax rates rising from 33 percent (low-price vehicles) to 79 percent (high-price vehicles).
- Health and VSL adjustments:
  - U.S. VSL assumed Rs 108 million (US$6 million) using PPP rate Rs 18 per US$1.
  - Per capita income ratio I_M/I_US = (US$12,480/$46,970=) 0.266.
  - Chosen VSL income elasticity η = 0.75.
  - Resulting VSL for Mauritius: Rs 40 million (US$2.2 million) — 37 percent of U.S. VSL.
- Local pollution damages:
  - Starting U.S. value: US$0.006 per kilometer; adjusted by VSL ratio and assumed emission rate (twice U.S.) → approximately Rs 0.08 per kilometer for Mauritius.
- Congestion marginal delays and costs:
  - Assumed peak travel speeds in Port Louis: 10 kilometers per hour; free-flow speeds: 25 kilometers per hour.
  - Extra travel time per kilometer at peak: 3.6 minutes (0.06 hours); averaged over peak and off-peak (assuming equal mileage): 1.8 minutes (0.03 hours) per kilometer.
  - Marginal delay assumed four times average delay: 7.2 minutes (0.12 hours) per kilometer in peak conditions.
  - Nationwide assumptions on driving shares: 25 percent Port Louis, 40 percent other urban, 35 percent rural.
  - Marginal delays averaged across country: 2.6 minutes (0.044 hours) per kilometer.
  - Value of travel time (VOT) for Mauritius:
    - U.S. urban VOT ≈ $10 per hour; per capita income ratio 0.266; elasticity of VOT to income assumed unity → Mauritius VOT = US$2.7 or Rs 49 per hour.
  - Marginal congestion costs averaged nationwide: Rs 2.1 per kilometer.
  - Port Louis marginal congestion costs: approximately Rs 12 and Rs 6 per kilometer for peak driving and averaged over time of day, respectively.
- Road accident externalities:
  - Road deaths in Mauritius, 2009: 140 total; pedestrian deaths: 54; pedal cyclist deaths: 16.
  - External fatalities counted: 70.
  - VSL used: Rs 40 million → total external cost from fatalities: Rs 2,800 million.
  - Additional non-fatal injuries, third-party property damage, traffic hold-ups assumed at 15 percent of fatality external costs → total external costs Rs 3,220 million.
  - Total vehicle kilometers travelled: 4,050 million → average external cost across all vehicles of Rs 0.8 per mile.
- Optimal gasoline tax calculation (selected formula and result):
  - Fuel economy assumed 13 kilometer per liter.
  - External cost components per kilometer used in formula: local pollution 0.06, accidents 0.08, congestion scaled factor: 2.1 × 0.67 (congestion benefits scaled down by one-third).
  - Scale factor for mileage-related externalities reflecting share of gasoline demand elasticity due to reduced driving: 0.5.
  - Computation: 13 × (0.06 + 0.5 × (0.08 + 2.1 × 0.67 + 0.8)) = Rs 15.6 per liter (optimal gasoline tax estimate).

*Source: _wp11124 - Box 1. Experience with Congestion Pricing in other Countries*

### REFERENCES

### _wp11124 - REFERENCES

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*Reference list from _wp11124 - REFERENCES*

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