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

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.