He increased gas taxes and prohibited car owners from driving during rush hour more than three times per week. He also handed over prime space on the city's main arteries to the Transmilenio, a bus rapid-transit system based on that of Curitiba, Brazil.
Bogotans almost impeached their new mayor. Business owners were outraged. Yet by the end of his three-year term, Mr. Peñalosa was immensely popular and his reforms were being lauded for making Bogota remarkably fairer, more tolerable and more efficient.
Moreover, by shifting the budget away from private cars, Mr. Peñalosa was able to boost school enrolment by 30 per cent, build 1,200 parks, revitalize the core of the city and provide running water to hundreds of thousands of poor.
The shift was all the more radical in that it was not motivated by the populist socialism that has swept much of Latin America. Mr. Peñalosa, the son of a Colombian politician and businessman, studied economics at North Carolina's Duke University. His first book shouted Capitalism: The Best Option. Yet even as he worked as a business management consultant, and later an economic adviser to the Colombian government, he began having doubts.
"I realized that we in the Third World are not going to catch up to the developed countries for two or three hundred years," he recalls. "If we defined our success just in terms of income per capita, we would have to accept ourselves as second- or third-rate societies - as a bunch of losers - which is not exactly enticing for our young people. So we are forced to find another measure of success. I think the only real obvious measure of success is happiness."
Mr. Peñalosa offers an eager " Como le va?" - how's it going - to a pair of dust-caked labourers cruising past on the bike path. He is clearly campaigning: Every commute is a chance to remind Bogotans that their bike routes were his idea, and their parks his doing. But he is also a preacher spreading the word.
"See those guys? Before, cyclists were seen as just a nuisance. They were the poorest of the poor," he says. "Now, they have respect. So bikeways are important … [because]they show that a citizen on a $30 bike is equally important to someone driving in a $30,000 car."
This principle of equity led him to hand road space over to public transit and pedestrian areas - a way of making private space public again.
University of British Columbia professor emeritus John Helliwell, who studies economics and human well-being, sees added value in such measures. "When you get data on people's life satisfaction, and you try and explain the differences, the variables that jump right out at you relate to the trustworthiness of the environment that people are living in. How much can they trust strangers? How well can they trust people in the neighbourhood? How trustworthy are the police? The more positive answers people give on these questions, the happier they are," Prof. Helliwell says.
"So what do you need to do to establish these higher levels of trust? It turns out that frequency of positive interaction is the key."
Public spaces that bring people together in congenial activity produce happier citizens than those - like traffic jams - that spur animosity and aggression, Prof. Helliwell says.
By linking the economics of happiness to urban design, Mr. Peñalosa really does seem to have made Bogotans happier. The murder rate fell by an astounding 40 per cent during his term and has continued to fall ever since. So have the number of traffic deaths. Traffic moves three times faster now during rush hour. And the changes seem to have transformed how people feel.
"The perception of the city has changed," says Ricardo Montezuma, an urbanist at the National University of Colombia. "Twelve years ago, 80 per cent of us were completely pessimistic about our future. Now, it's the opposite. Most of us are optimistic," he says, referring to Gallup polls.
"Why is this important? Because in a big way a city is really just the sum of what people think about it. The city is a subjective thing."
Bogotans don't give Mr. Peñalosa all the credit. Every Sunday since the 1970s, Bogota has blocked off its major roads so that citizens can jog, walk or bike in safety. These ciclovia days transform the avenidas into vast, linear parks, where more than two million Bogotans come to play, picnic, do aerobics and eat sweet arepa bread from mobile vendors. A generation has grown up knowing streets can change.
But people have changed too. Mr. Peñalosa's unorthodox predecessor, Antanus Mockus, is credited with building a new culture of citizenship. The former philosophy professor hired mimes to make fun of bad drivers. He sent actors dressed as monks into the streets to encourage people to think about noise pollution. He gave out thousands of coloured cards - the kind referees use in soccer games - so people could express their disproval of others' driving.