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We provide a framework for recovering second-best optimal tolls when policymakers
exempt clean vehicles from congestion prices. Our framework includes congestion and
emissions externalities, plus policy responses like changes in vehicle ownership, leakage,
and residential sorting. Using Swedish administrative microdata, we identify these
responses by exploiting vehicle- and location-based exemptions from Stockholm’s congestion
charge. Commuters respond by adopting exempted alternative fuel vehicles,
shifting trips away from conventional and toward alternative fuel vehicles, and changing
where they live and work. We combine these estimates with our optimal tax framework
to recover an optimal congestion charge of €10.09 per trip in Stockholm.
