Interactions between climate and local air pollution policies: the case of European passenger cars

Several studies have found that taxing vehicle purchase or ownership on the basis of carbon dioxide (CO2) emissions reduces CO2 emissions. This paper shows that CO2-based vehicle taxation can raise emissions of other pollutants that harm air quality and that the magnitude of this unintended effect depends on consumer substitution across and within gasoline and diesel fuel vehicles. Using data on European vehicle registrations, fuel prices, fuel taxes, and vehicle taxes from 2002 through 2010, estimate the relevant substitution patterns and compare the performance of several empirical strategies based on the recent vehicle tax literature. According to the preferred specification, vehicle tax reforms have increased nitrogen oxide emissions, which harm local air quality. Moreover, fuel-based CO2 taxes introduce milder trade-offs between CO2 and nitrogen oxides emissions than do vehicle taxes.