Wednesday, November 23, 2005

Coase Theorem and Externalities of Smog Pollution In California

Incentives matter.
Let me first explain how the present tax structure is in California.
What Fees Are Due When Registering a Vehicle?

Various fees are due upon initial registration and annual registration renewal. Some fees are due for every vehicle upon registration. Assessment of other fees is based on:

* Type of vehicle (auto, trailer, etc.)
* Owner’s county of residence
* Special license plates
* Unpaid Parking Violation/Toll Evasion Bail

The registration fee and the CHP fee are due for the vast majority of vehicles registered for use on the highway. This money is used by the California Highway Patrol (CHP) and the Department of Motor Vehicles (DMV) to offset costs. A Reflectorized License Plate fee is assessed upon initial registration on most vehicles.

Vehicle License Fee

Most vehicles are also assessed a Vehicle License Fee (VLF). The VLF was established by the Legislature in 1935 in lieu of a property tax on vehicles. The formula for VLF assessment established by the Legislature is based upon the purchase price of the vehicle or the value of the vehicle when acquired. The VLF decreases with each renewal for the first 11 years. The DMV returns almost all vehicle license fee revenue to the cities and counties. For more details on how your VLF money is used, contact your local city or county government officials.

Since property taxes are raised on the presumed value of a car the newer and more expensive vehicles have the larger fees and older (especially over 11 years) pay the least amounts.

The other process in registration is getting a smog certificate. The certificate charges for this is relatively small (I believe $8-10) but is required when paying to have a smog check station do the check. And the station collect somewhere between $30 and $50.

While the smog checks do measure the amount of pollutants, it only provides a pass, no pass or extreme violator. The last category they can confiscate your vehicle. If the vehicle fails the test, the test can be redone again.

So what are the incentives? The incentive is to pass the test only and to keep older less efficient and more polluting cars on the road.

So how can we create incentives that promote a cleaner healthier environment for all?
The amount of pollution a vehicle emits is known fairly precisely since the smog check shows levels of pollutants for any given RPM and the miles driven since the last check is recorded also. So it would be a fairly easy calculation on the past years amount of pollution a vehicle put into the air. Miles driven multiplied by the average pollution per mile.

The tax would then be based on how much damage the vehicle actually polluted and in turn a rough estimate of the external costs of the consumption (externalities). If one pollutant was higher or caused more damage, you could adjust the taxes to reflect the social costs associated with that type of pollution.

What are the incentives in this tax package?
1. Encourage less consumption of gasoline, no matter what vehicle a person had. Some pollution is directly related to miles driven.
2. Encourage the use of less pollutant/more efficient vehicles. It is not the process of buying a Hummer that is the sin. It is the consumption of fuel and the corresponding pollution that comes from it. Let me use my family as an example. When growing up we had 2 or 3 cars one was an F150 (12mpg) truck and the other a VW Bug(30mpg). So were they sinning since they had an inefficient vehicle or were they a saint for the opposite? Because of the options presented to them they could use one vehicle for tasks that were inefficient but for short durations and other tasks on a daily basis to save fuel (costs).
3. Encourage the maintenance of all vehicles on the road. Since the tax is not a pass/no pass result and is based on actual level, then any reduction in pollutants per mile would decrease the tax. This should create markets that cater to reducing pollutants in older vehicles and incentives for upkeeping a cars performance.
4. Allows the market to drive choices that are better for society than dictates from the government.
5. Encourages mass transit while still providing an opprotunity for every economic group the benefits of owning a vehicle. As we saw in Katrina the poor did not have access to transportation and here is an interesting post.

While I have written about this on several occasions including Governor Arnold, this was inspired by my discussions at ThomHartman's Blog about externalities and the dividing line between public and private providers of services...
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