Using Tradeable Permits to Achieve Sustainability in the World's Large Cities: Policy Design Issues and Efficiency Conditions for Controlling Vehicle Emissions, Congestion and Urban Decentralization with an Application to Mexico City

Many large cities in the world have serious ground level ozone problems, largely the product of vehicular emissions and thus the argued unsustainability of current urban growth patterns is frequently blamed on unrestricted private vehicle use. This article reviews Mexico City's experience with vehicle use restrictions as an emissions control program and develops the conditions for optimal quantitative restrictions on vehicle use and for complementary abatement technologies. The stochastic nature of air pollution outcomes is modelled explicitly in both the static and dynamic formulations of the control problem, in which for the first time in the literature the use of tradeable vehicle use permits is proposed as a cost-effective complement to technological abatement for mobile emissions control. This control regime gives the authorities a broader and more flexible set of instruments with which to deal more effectively with vehicle emissions, and with seasonal and stochastic variation of air quality outcomes. The market in tradeable vehicle use permits would be very competitive with low transactions costs. This control policy would have very favorable impacts on air quality, vehicle congestion and on urban form and development. Given the general political resistance to environmental taxes, this program could constitute a workable and politically palatable set of policies for controlling greenhouse gas emissions from the transport sector.