An empirical evaluation of the effectiveness of CO2-related vehicle taxation in Europe

Abstract

Vehicle taxation based on a car's CO2 emission levels is increasingly adopted in European countries. This paper describes a model of oligopolistic competition in markets with differentiated products, simulating demand and supply under alternative tax regimes in the car market using a detailed dataset of car data for a number of European countries. The objective is to determine consumer willingness to pay for environmentally friendly vehicles and to perform simulations in order to evaluate policies that could shift consumer purchases towards low-CO2 cars and thus lead to the reduction of fuel use and CO2 emissions. Focusing on an analysis of the car market of Greece, we assess changes in consumer welfare, public revenues, firm mark-ups and CO2 emissions according to different policy scenarios compared to the current vehicle taxation regime.