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Reducing CO2 emissions of cars in the EU: analyzing the underlying mechanisms of standards, registration taxes and fuel taxes

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Abstract

Road transport, especially passenger car transport, is one of the largest contributors to greenhouse gas emissions. The major elements of the strategy of the European Union (EU) in order to reduce car emissions—such as CO2 emission regulations from new passenger cars, vehicle-related fiscal measures and fuel economy labelling—have not resulted in significant reductions of greenhouse gas emissions over the last two decades. We focus in this paper on the theoretical understanding of how different policy instruments affect the decisions of (rational) consumers with an emphasis on registration taxes. Our major conclusions are as follows: (i) Theoretical analyses of the effects of taxes and standards in car transport are already very informative for policy design, even before quantitative assessments with observed data are available; (ii) CO2 emission standards will not deliver the theoretically possible CO2 reduction due to the rebound effect, and they are questionable for regulating the average car as applied in the context of EU to car manufacturers; (iii) the rebound effect of standards depends on the service price elasticity, which plays also a crucial role how fuel taxes affect demand; the magnitude of the service price elasticity determines which of these instruments is more effective with respect to energy conservation; (iv) combining fuel taxes and standards may allow for a win-win situation for the environment and car drivers but not for the current kind of EU regulation; and (v) a registration tax is equivalent to a standard binding consumers’ decisions (this does not apply to the current EU regulation), in particular, both lead to demand rebounds.

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Notes

  1. The European, Japanese and Korean car manufacturers associations.

  2. This approach could be used in further analyses also for qualitative investigations which are outside the scope of this study; see also data needed in section “Conclusions”.

  3. This issue may be different from a welfare analysis point of view. For example, a standard that affects a service demand with a high rebound will not be efficient with respect to conservation but may improve welfare of consumers.

  4. In addition, there are country-specific markups net of taxes that depend on the level of registration taxes. For example, Finland with its high registration tax enjoys cheaper import prices of cars than otherwise similar countries as Germany, Austria or Belgium; see Fig. 3.

  5. For the calculation of the average CO2 emissions of alternative fuels, pure electric, liquefied petroleum gas vehicles, natural gas vehicles, ethanol E85, biodiesel, hybrid and plug-in vehicles are included.

  6. The geographical scope of the data changes over time from EU-15 to the EU-25 and the EU-27. For details, see EEA, 2014.

  7. The capital recovery factor includes a discount rate which is not explicitly specified in this paper.

  8. Note that differences in quality could also be a criterion to be included in the analysis; see Walker and Wirl (1993). However, in this paper, we do not focus on different individual preferences of consumers.

  9. In practice, the individual level of service demand may also be a function of the specific needs (e.g. linked to locations and the reasons for travelling such as going to work) and the time available (see for example Mokhtarian & Chen (2004)).

  10. In this paper, we focus on long-term effects. The short-term price elasticities reflect very short term responses to price and income changes which are not the focus of this paper.

  11. However, the associated increase in car prices because higher efficiencies are not free and may delay the replacement of old and inefficient cars.

  12. It should be noted that the relationship between a registration tax and the specific CO2 emissions will also depend on the elasticity of investment costs.

  13. For more details regarding the discussion on rebound effects in transport, see e.g. Sorrell et al. (2009), Ajanovic et al. (2012b) and Small and Van Dender (2007).

  14. For an empirical analysis, mainly data for vkm, fuel price, fuel intensity, number of cars purchased and registration taxes by size category and income would be necessary, see Ajanovic and Haas (2012) and Ajanovic et al. (2012a).

  15. Note that, in particular, there could be a difference between households depending on income, e.g. low-income households who may not have the resource to buy a new car are more impacted by the fuel tax.

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Correspondence to Amela Ajanovic.

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Ajanovic, A., Haas, R. & Wirl, F. Reducing CO2 emissions of cars in the EU: analyzing the underlying mechanisms of standards, registration taxes and fuel taxes. Energy Efficiency 9, 925–937 (2016). https://doi.org/10.1007/s12053-015-9397-4

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