Monitoring, predicting and understanding traffic conditions in a city is an important problem for city planning and environmental monitoring. GPS-equipped taxis can be viewed as pervasive sensors and the large-scale digital traces produced allow us to have a unique view of the underlying dynamics of a city's road network. In this paper, we propose a method to construct a model of traffic density based on large scale taxi traces. This model can be used to predict future traffic conditions and estimate the effect of emissions on the city's air quality. We argue that considering traffic density on its own is insufficient for a deep understanding of the underlying traffic dynamics, and hence propose a novel method for automatically determining the capacity of each road segment. We evaluate our methods on a large scale database of taxi GPS logs and demonstrate their outstanding performance.