This article examines the cost-effectiveness of various possible policy instruments to reduce CO2 emissions from cars in Europe. The analysis is based on a partial equilibrium simulation model for European passenger transport (EUCARS) that allows an assessment of the welfare effects of policy measures. Simulations show that carbon taxes are superior to corporate average fuel economy systems or rebate schemes, which in turn are found to be more cost-effective than policies relying on increases in annual car ownership taxes. This result is qualified in the presence of car manufacturers with different compliance costs, and when consumers underestimate the fuel use over the vehicle's lifetime when they decide to buy a new car. (Author/publisher).
Abstract