Dieselization, CO2 emissions and fuel taxes in Europe

The stock of diesel motor cars has been growing during the last decades in Europe and nowadays accounts for nearly 40% of automobile fleet. Two issues helps explain this process. Firstly, fuel efficiency (liters/km) of diesel cars is about 20% higher than that of gasoline cars on average; secondly European governments have implemented tax policies lenient with diesel fuel, thus generating an extra stimulus to use diesel motor cars. We build on an dynamic general equilibrium model that makes distinction of diesel motor and gasoline motor vehicles, and calibrate it for main European countries. The model reproduces the vehicle fleet dieselization, the rebound effects in kilometers driven, the demand for fuel, and CO2 emissions dynamics. From a normative view, the model recommends a tax discrimination according to the carbon content of each fuel, and not according to the fuel efficiency of the engine. Given that such a content is 15% higher for diesel relative to gasoline, tax rates should reflect this point: 1.40 cents of Euro per liter of diesel, and 1.22 cents per liter of gasoline. This is equivalent to imposing a tax of 19 Euros per ton of carbon. Yet Pigouvian sale taxes on new cars are useless to internalize the costs of externalities. Both recommendations are radically different to the existing fuel tax design in most OECD countries, except in Australia, Switzerland, UK and the US.