Interactions between Climate and Local Air Pollution Policies: The Case of European Passenger Cars

Many European countries have adopted carbon dioxide–based (CO2-based) vehicle taxes to help reduce transportation sector emissions. The literature has shown that these policies reduce CO2 emissions but has not considered whether they affect emissions that harm local air quality. This paper analyzes whether CO2-based taxes have an unintended consequence of raising emissions of nitrogen oxides (NOx) and particulates, which harm local air quality. Using highly detailed data on European new vehicle registrations from 2002 through 2010, I estimate the effects of fuel costs and vehicle taxes on consumer vehicle choices. The CO2-based vehicle taxes reduce CO2 emissions but increase NOx and particulates emissions. The environmental harms from the NOx and particulates emissions roughly offset the benefits of the lower CO2 emissions. Because of the estimated substitution patterns, fuel-based CO2 taxes introduce milder trade-offs than do vehicle taxes.