The Effect of Congestion Charge and Fuel Arbitrage on Air Quality in Stockholm

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The Effect of Congestion Charge and Fuel Arbitrage on Air Quality in Stockholm Master thesis in Finance STOCKHOLM SCHOOL OF ECONOMICS The Effect of Congestion Charge and Fuel Arbitrage on Air Quality in Stockholm Yan Chen1 Abstract In August 2007, the congestion charge is launched in Stockholm after a seven-month trial period in 2006. This paper applies empirical methods to estimate the effects of the implementation of congestion charge on the air quality in Stockholm. I find that the trial and permanent congestion tax have reduced the emissions of major air pollutants. I also find evidences that the time-varying congestion pricing decreased the air pollutions in peak hours, and suggestive signs of peak spreading onto non-peak hours. In addition, I show that the fuel switching behavior by FFV (Flexible Fuel Vehicle) motorists might have mixed effects on different air pollutant emissions. Key words: Air quality, Congestion charge, Fuel sales, Green cars, Stockholm Supervisor: Cristian Huse Presentation: 23 May 2013 Discussants: To be determined Acknowledgement: I would like to specially thank my supervisor Cristian Huse for giving me so much great advice and guidance, and for being patient and supportive. I also thank my family and my friends for their love and support. I dedicate this paper to my mom to whom I owe the world. 1 [email protected] or [email protected] 1 Table of Contents List of Figures ..................................................................................................................................................... 3 List of Tables ....................................................................................................................................................... 3 1. Introduction ............................................................................................................................................... 4 2. Background ................................................................................................................................................ 6 2.1. Congestion Charge in Stockholm......................................................................................... 6 2.1.1. The control points / toll stations (cordons) ..................................................... 6 2.1.2. Congestion tax pricing ............................................................................................... 7 2.1.3. Exemptions from the congestion charge............................................................ 8 2.1.4. Tax payment .................................................................................................................. 8 2.2. Swedish Green Car Rebate ..................................................................................................... 8 2.3. Fuel prices, fuel sales and fuel arbitrage .......................................................................... 9 2.3.1. Gasoline vs. ethanol adjusted prices .................................................................... 9 2.3.2. Fuel arbitrage and environmental impact ....................................................... 10 2.4. Air quality in Stockholm ....................................................................................................... 12 3. Literature Review .................................................................................................................................. 15 4. Data description ..................................................................................................................................... 17 5. Methodology ............................................................................................................................................ 18 5.1. Congestion tax in Stockholm ............................................................................................... 18 5.2. Time-varying congestion tax .............................................................................................. 19 5.3. Fuel prices, fuel sales and fuel switching ....................................................................... 20 6. Results ........................................................................................................................................................ 21 6.1. Congestion tax in Stockholm ............................................................................................... 21 6.2. Time-varying congestion tax pricing ............................................................................... 26 6.3. Fuel price, sales and fuel arbitrage ................................................................................... 30 7. Discussion ................................................................................................................................................. 31 8. Conclusion ................................................................................................................................................ 33 9. References ................................................................................................................................................ 35 9.1. Literatures .................................................................................................................................. 35 9.2. Electronic: ................................................................................................................................... 36 10. Appendix ......................................................................................................................................... 38 10.1. Measuring air quality in Stockholm ............................................................................ 38 10.2. Summary of the air quality and weather monitoring stations ......................... 39 10.3. Summary of air pollutants’ features ............................................................................ 40 10.4. Robustness checks .............................................................................................................. 41 10.4.1. Using logs of air pollutions .................................................................................... 41 10.4.2. Results with control for lagged weather variables (up to 3 hours) ...... 42 2 List of Figures Figure 1: Map of congestion charge control points (cordons) ........................................ 6 Figure 2: Gasoline (#95) price & adjusted ethanol (E85) price, source: Statoil ...... 9 Figure 3: Monthly delivered volume of E85 (m3), source: SPBI ................................. 10 Figure 4: Gasoline-ethanol price premium and adjusted ethanol sales shares .... 11 Figure 5: Daily concentration of air pollutants in Stockholm ....................................... 13 Figure 6: mean weekly pollution level, 4th order polynomial time trend ................ 22 Figure 7: Effect of time-varying congestion pricing .......................................................... 27 Figure 8: Average daily air pollution in Stockholm (in logs) ........................................ 38 Figure 9: Average daily pattern of air pollutants in Stockholm ................................... 39 Figure 10: Effect of time-varying congestion pricing on air quality (logs) ............. 42 Figure 11: Effects of time-varying congestion pricing (controlled for lagged weather) ..................................................................................................................................... 42 List of Tables Table 1: Congestion charge control points .............................................................................. 6 Table 2: Congestion tax pricing scheme .................................................................................... 7 Table 3: Effect of Congestion Tax Trial on Air Pollutions – OLS .................................. 21 Table 4: Effect of Permanent Congestion Tax on Air Pollutions – OLS & RDD ...... 22 Table 5: Effect of Congestion Tax on Air quality – Local Linear Regression .......... 26 Table 6: Effect of fuel switching on air quality 2007/08 - 2010 .................................. 30 Table 7: Summary of air quality and weather measuring stations ............................ 40 Table 8: Summary of air pollutants .......................................................................................... 40 3 1. Introduction In many cities air pollution is reaching levels that would threaten people's health. More than 2 million people die every year from breathing in air pollutants present in indoor and outdoor air environment according to WHO estimate. Particulate matters (PM10 or PM2.5) for example, can penetrate into the lungs and enter the bloodstream, thus may cause heart disease, lung cancer, asthma, and acute lower respiratory infections. (WHO, 2011) In January 2013, Beijing and some other cities in China encountered an outburst of one of the worst periods of air quality in recent history, with smoggy weathers and air pollution levels that would be referred as “hazardous” by WHO. The ground-based sensors at the U.S. Embassy in Beijing reported PM2.5 concentration of 291 micrograms per cubic meter of air, way above the WHO air quality guidelines of below 25 micrograms per cubic meter as an annual average. (WHO, 2005) Sweden, though ranked as the 25th cleanest country in the world in a WHO study in 2011, also has some work to do to fully meet WHO standards for air quality. For example, some of the most populated municipalities in Sweden suffer from above-standard concentrations of Nitrogen Dioxides and PM10. (EPA) Since a major source
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