Abstract
The number of diesel cars in Europe has grown significantly over the last three decades, a process usually known as dieselization, and they now account for nearly 40% of the cars on the road. We build on a dynamic general equilibrium model that makes a distinction between diesel motor and gasoline motor vehicles and calibrate it for main European countries. Firstly, we find that the dieselization can be explained by a change in consumer preferences paired with the productivity gains from the specialization of the European automotive industry. Secondly, the lenient tax policies in favor of diesel fuel help to explain the rebound effect in road traffic. Finally, from a normative standpoint, the model suggests that a tax discrimination based on the carbon content of each fuel (higher for diesel relative to gasoline) would actually be more effective in curbing {text {CO}}_{2} emissions rather than a tax based on fuel efficiency. Based on the existing studies, we also document that other external costs of diesel are always higher than those of gasoline, and the Pigouvian tax rates should reflect this aspect. This recommendation is radically different to the existing fuel tax design in most European countries.
Highlights
The composition of the passenger car fleet has been transformed in Europe over the last few decades
We address these issues by building a dynamic general equilibrium (DGE) model taking into account the decisions surrounding the purchase and usage of a car (Wei 2013), together with the generation of CO2 emissions and its external effects on climate change (Golosov et al 2014)
In order to analyze the correlation between these variables and to characterize whether the fuel taxation is optimal, we rely on predictions from a dynamic general equilibrium (DGE) model, which puts together several of the most important aspects of the cars sector and makes the distinction between diesel motor and gasoline motor vehicles
Summary
The composition of the passenger car fleet has been transformed in Europe over the last few decades. Pigouvian taxation would require a 0% sale tax on new purchases of cars to internalize the external costs of CO2 emissions Both results are at odds to the policy of dieselization implemented during the last decades in most OECD countries. We show that the current tax design in Europe has caused an increase in traffic density by 2.7% and in CO2 emissions by 2.4% in excess of those levels obtained under the Pigouvian scenario To our knowledge, this is the first paper addressing all these issues related to dieselization using a DGE model.
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