Social Benefits and Private Costs of Driving Restriction Policies: The Impact of Madrid Central on Congestion, Pollution, and Consumer Spending

Abstract Low Emission Zones are defined areas within a city where driving restrictions are introduced with the aim to reduce pollution, but they may also unintentionally distort consumer spending decisions. By increasing transportation costs to ban-affected areas, driving restrictions could discourage spending in stores of those areas. This paper empirically evaluates the effects of a driving restriction regulation in Madrid, Spain, known as Madrid Central. First, using a difference-in-differences identification strategy, we find an immediate decrease of 19% in pollution and of 16% in congestion with pollution dropping further once fines were levied. Second, we rely on credit card transaction data to show consumers affected by the regulation reduced their brick-and-mortar spending in the regulated area by 21%. Finally, because affected consumers partially substitute their consumption spending from brick-and-mortar to online shopping, we find suggestive evidence that e-commerce may smooth the impact of changes in transportation costs due to environmental regulations.