Abstract
Freight trucks cause air pollution, highway damage, and congestion. While diesel taxes reduce the pollution and congestion externalities, they worsen highway damage because a fuel price increase causes carriers to dispatch cargo on fewer but heavier trucks. Using individual truck data from California and New York and an IV approach that exploits the dual use of diesel fuel for transportation and heating, the authors show that a Pigouvian carbon tax on diesel fuel can lower net welfare. In the absence of a tax on axle-weight-miles (road damage), a fuel efficiency standard may welfare-dominate a diesel fuel tax as a mechanism to control carbon emissions.