Journal Issue

Attacking Air Pollution in Mexico City

International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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As Mexico City steps up its battle against air pollution, the city is trying to economize on polluting trips, as well as make cars and fuels cleaner. A carefully crafted program combines pricing and regulatory measures to stimulate these changes.

For the 15 million residents in Mexico City, air pollution levels are not only a nuisance but also a cause of health problems. Ozone levels systematically exceed by far the levels that result in inflammation and irritation, and the concentration of particulates causes breathing problems and premature deaths, particularly among the elderly.

The Mexican Government has moved quickly in recent years to attack the severe pollution problem. Acute crises have been handled by shutting down polluting factories, redirecting traffic, and closing off certain areas for motor vehicles. The authorities have also taken steps to reduce lead contamination, which is known to cause learning disabilities among children and hypertension among adults. Unleaded gasoline and catalytic converters have been introduced, and thousands of taxis, mini-buses, and buses must either be replaced by new ones or retrofitted to be less polluting. All motor vehicles are required to pass an emissions test every 6-12 months. And gasoline prices have been sharply increased, discouraging consumption of the major pollution-creating good—essential in any rational pollution control program.

The challenge, however, is daunting. One of the Government’s attempted solutions—the fall 1989 regulation requiring every car to stay off the streets a specified weekday—initially gave some relief but may actually have backfired, as many households responded by buying an additional car. Shifts in gasoline consumption indicate that the regulation may eventually have increased vehicle use and pollution—underscoring that such measures should only be used on a temporary emergency basis.

How, then, can a rational action program be put together? Which technical and behavioral changes can reduce the excessive flow of emissions? And if one knows the most cost-effective changes, should incentives or regulations be used to convince households and firms to adopt them? These are the questions we set out to answer.

Policy options

As in most major metropolitan areas, Mexico City’s air pollution comes from industry, homes, fuel-based transportation, and natural sources (windblown soil)—all areas that the Government is targeting. Our analysis focused on the transport sector, which contributes about half of the city’s total emissions. Even within this sector, the problem could be tackled on many fronts. Vehicles and fuels could be made cleaner, people could be convinced to drive less, and less-polluting modes of transport could be promoted. The latter would be especially useful in Mexico City, where private vehicles (cars and taxis) carry only 37 percent of total passenger kilometers, while emitting 68 percent of the sector’s pollution.

It is useful to view the various options (cleaner cars, fewer trips) as competing suppliers of emissions reductions. From this perspective, to be efficient, pollution reductions should always be procured from the least-costly source (see box). Economic theory tells us that taxing pollution directly would conform with this prescription, since it would provide incentives to firms and individuals to pursue emissions reductions in the least-costly manner. But because Mexico City’s sources of pollution are many and varied (buses, taxis, and private vehicles, all of varying ages), each vehicle’s emissions cannot be monitored continuously, so it is not feasible to tax emissions directly.

This means that policymakers will have to use indirect instruments, which target proxies for emissions (indicators of how clean the car is and how much it is used). These indicators could be influenced by regulations (emissions standards) and market-based tools (fuel taxes). To choose, however, one needs to evaluate the social costs per unit of emissions reduction, an area to which we now turn.

Cleaner trips

If policymakers want to evaluate the various ways of making vehicles and fuels cleaner, they will need to know the economics of vehicle modifications—that is, what yields the most emissions reductions per dollar invested? For example, one possibility is to invest (or have car owners invest) in a catalytic converter that costs US$400 and reduces emissions by 95 percent. Whether this investment is attractive depends chiefly on the vehicles targeted. Experience demonstrates that the cheapest emissions reductions generally are found among the busiest vehicles, especially those driven mostly downtown during the day. Of course, if greater emissions reductions are desired, modifications must be sought for a larger part of the vehicle fleet, even if reductions become comparatively expensive.

A town meeting

Public official: How should we best use our limited resources to cut pollution?

Engineer: Let’s start with introducing unleaded gasoline and insisting that all taxis be new, with catalytic converters. Making old cars cleaner is more complicated, but it probably should be done, as so many people keep their cars a long time.

Economist: OK, but since we could also use this money in other ways to improve peoples’ lives, let’s make sure we do this as cheaply as possible. Let’s see if we could convince people to economize on trips as well.

Public official: Fine, but people need to get to work. How would they manage, and how would you figure out which trips people can do without?

Economist: Well, they’ll know better than us. People could carpool, walk, take public transportation, or choose lovers and employers in their neighborhood. As for gauging costs, one way to do that would be to tax gasoline. If people reduce travel owing to the higher cost of gasoline, we would know that those trips are not essential to them. Besides, the revenues could be used for other purposes.

We can visualize these trade-offs by looking at the chart, which shows the incremental costs when further emissions reductions are sought (the scientific basis for weighting contaminants according to toxicity is still weak, but an attempt has been made). In Mexico City, some technical measures, such as retrofitting high-use vehicles for liquefied petroleum gas and making service stations recover vapors, actually yield net savings. All the other measures ride up the curve. Emissions standards are at the lower end. These should be targeted at taxis first, as annual emissions reductions for them would cost only US$300 a ton, because of their higher annual mileage, compared with US$1,600 a ton for passenger cars. Mandatory inspection and maintenance programs for vehicles in use are in the middle, with costs rising as the standards are tightened. Improvements in the fuel mix are at the higher end.

But which tools should policymakers pick to make sure that these emissions reductions occur at the lowest possible cost? The chart also shows why sometimes regulations are best, and sometimes incentives. Take the case of fuel conversion. If compressed natural gas were provided at a lower price than other fuels, it would provide incentives to owners of high-use vehicles to convert. By contrast, such incentives could not be-employed to stimulate the use of catalytic converters and unleaded gasoline, since cars without converters could also use unleaded gasoline. Thus, if a city wanted to force only high-use vehicles to become cleaner, it could use fuel prices to stimulate conversions to gas, but would have to rely on regulation (licensing of taxis) to stimulate the use of catalytic converters. Moreover, both programs may be accelerated by subsidized credits, if fuels are taxed.

Fewer trips

Beyond US$1,200-$1,500 a ton, however, emissions reductions get very expensive, and beyond that stage, demand management—making people economize on trips—must play an increasingly important role. Discouraging nonessential driving is critical, since vehicles still pollute, even after emissions controls are in place. But many industrial countries, such as the United States, rely almost exclusively on other measures—notably, imposing emissions standards on new vehicles and requiring vehicle inspections—in effect, ignoring that sacrificing a trip could be more attractive to consumers than very costly technical controls.

Policymakers can discourage the use of cars through a variety of means, including high-occupancy-vehicle lanes, car-free zones, and parking fees. But one of the simplest, most effective ways is through a gasoline tax, which raises the private cost of travel, especially for low-occupancy, fuel-intensive vehicles. A gasoline tax can have a major impact on vehicle use because it gives consumers the choice of making fewer trips, walking or bicycling, or using higher-occupancy transport modes—thereby helping them to screen out the least-essential trips.

For a pollution control program to be effective, our analysis shows that gasoline should be taxed according to the average emissions per liter, so that it exactly matches the cost per ton of the most expensive technical control option. That way, as increasingly costly emissions controls are required, consumers will also forgo increasingly valuable trips, because the tax rate rises. By pursuing technical controls and demand reductions equally aggressively, emissions reductions will always be obtained at the lowest possible costs.

The lower curve in the chart illustrates this principle, showing the costs when the technical measures are combined with a gasoline tax. The curve is drawn using a medium-term gasoline price elasticity of -0.4 (assuming for every 10 percent increase in price, consumption falls by 4 percent), which is in the middle of a range of estimates from Mexico. This parameter reflects a moderate drop in demand and a shift toward less fuel-intensive modes of transport. As one climbs the curve, the tax is adjusted upward in parallel with the cost of other options. The upper curve shows the costs of reducing total emissions when one does not use an optimal gasoline tax.

Controlling air pollution from transport in Mexico City

Source: Eskeland, 1992

We found that by using only the measures designed to decrease emissions per kilometer, Mexico City could reduce current emissions from transport by 1.2 million weighted tons annually (about 70 percent) at an annual cost of US$580 million. But by including a gasoline tax of 6 cents per liter, or about 26 percent, it could achieve the same reduction with a saving of about US$65 million, or 11 percent (the shaded area in the chart). The welfare costs of applying the tax, represented by trips forgone, are thus more than outweighed by the costs saved on other measures.

There would be other benefits, too. Such a gasoline tax, motivated by pollution abatement alone, would generate an estimated US$350 million in public revenue in Mexico City alone, not to mention reducing congestion, road damage, and accidents. Thus, there are many reasons to tax gasoline at a higher rate, as is now being done.

How much flexibility is there on the demand side? Undoubtedly, public modes will have a tough time competing for passengers as incomes and aspirations grow if gasoline prices are low. Indeed, we believe the subsidy requirements to make public transportation attractive will be daunting, if not prohibitive, unless public transport initiatives are supported by measures such as gasoline taxes, parking charges, and perhaps area licensing, all of which make high-occupancy services more competitive.

Instruments will also differ in their distributive effects. For instance, emissions controls for used cars would hurt the poor more than would controls for new cars. Whether a gasoline tax is less progressive than alternative instruments has not yet been analyzed in developing countries; it will likely depend on whether car ownership and use has reached the poorer segments of the population.

Best policy mix

In sum, two levers can be pulled in the drive to reduce emissions: policies aimed at making vehicles and fuels cleaner, and policies aimed at reducing demand for polluting vehicle trips. When pollution taxes cannot be implemented, our study recommends a mix of both strategies.

To reduce emissions by modifying fuels and vehicles, we find that some measures will be best implemented by regulation, others by market-based instruments. But when it comes to reducing demand, taxation is immensely more effective than regulation, which often limits choices unnecessarily. This was exemplified by Mexico City’s one-day-a-week driving ban, a measure that could have been effective on a temporary basis, but which proved ineffective when applied permanently. Gasoline taxes, in contrast—now being forcefully applied in Mexico—manage demand by screening out only the least essential trips.

How useful are these findings for other cities? The particular measures that will be the most cost-effective may vary from city to city, but the analytical approach should be widely applicable—as should the recommendation that market-based incentives (gasoline taxes) work better than regulation in general demand management.

For a fuller discussion, see Eskeland’s “A Presumptive Pigouvian Tax on Gasoline: Analysis of an Air Pollution Control Program for Mexico City,” 1992, available from the author.

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