Healthy Climate, Healthy Bodies: Optimal Fuel Taxation and Physical Activity

Passenger transport has significant externalities, including carbon emissions and air pollution. Public health research has identified additional social gains from active travel, due to the health benefits of physical exercise. Per mile, these benefits greatly exceed the external costs from car use. We introduce active travel into an optimal fuel taxation model and characterize analytically the second-best optimal fuel tax. We find that accounting for active travel benefits increases the optimal fuel tax by 44% in the USA and 38% in the UK. Fuel taxes should be implemented jointly with other policies aimed at increasing the uptake of active travel.