Pigouvian Taxes at Odds: Freight Trucks, Externalities, and the Dispatch Effect
Linda R. Cohen and Kevin D. Roth
External costs of freight trucks include air pollution, highway damage and congestion. We show that diesel taxes reduce both the pollution and congestion externalities, but worsen highway damage: an increase in the fuel price causes trucks to adjust dispatch decisions so as to reallocate their loads to fewer but heavier trucks. Even with the associated decline in total demand for cargo, the dispatch effect leads to a net increase in road damage. We investigate the relationship between diesel fuel prices and freight truck activities using individual truck data recorded by road sensors in California and New York between 2011 and 2015. The dual use of diesel fuel in New York for transportation and home heating enables an IV approach to estimate price elasticities for fuel demand, cargo dispatching, road damage, and vehicle-ton miles traveled. We use the estimates to compare diesel tax increases and fuel economy standards for heavy trucks and show that for a wide range of parameters and in the absence of a second instrument that internalizes road damage externalities, first, the external costs associated with a carbon tax on diesel dominate its benefits and second, that efficiency standards for heavy trucks may be a better approach to reducing carbon emissions than taxes.