Fuel Taxation, Regulations and Selective Incentives: Striking the Balance

Abstract

This chapter discusses to what extent fuel taxes may need to be complemented by other government-induced measures for achieving a cost-effective reduction of carbon emissions from cars. The conclusion is that market failures and the need to prepare for longer-term climate objectives make it essential to regulate the specific fuel consumption of new cars. The current European regulation, being full of derogations and other loopholes, makes support from national incentive schemes important. However, for efficiency, and in order to prevent excessive taxation, common guidelines are needed. They should prescribe that all incentives must comply with certain basic principles, the three most important being technical neutrality and equal treatment of all cars; continuous incentive (rather than a number of CO₂ thresholds); and that the size of fees and bonuses should not depart substantially from the marginal abatement cost in other sectors. However, selective incentives to emerging technologies by definition cannot be technologically neutral. Such incentives, thus, should only be allowed if the member state can show that there are good reasons to expect that the learning curve and economies of scale will make production cost decline considerably. This requirement will prevent them from subsidizing mature technologies and minimize the risk for lock-in effects and the distortion of competition.