Fuel Taxes versus Effi ciency Standards – An Instrumental Variable Approach

Using household travel diary data collected in Germany between 1997 and 2012, we employ an instrumental variable (IV) approach to estimate fuel price and effi ciency elasticities. The aim is to gauge the relative impacts of fuel economy standards and fuel taxes on distance traveled. We fi nd that the magnitudes of the elasticity estimates are statistically indistinguishable: higher fuel prices reduce driving by the same degree as higher fuel effi ciency increases driving. This fi nding indicates an off setting eff ect of fuel effi ciency standards on the eff ectiveness of fuel taxation, calling into question the effi cacy of the European Commission’s current eff orts to legislate CO2 emissions limits for new cars given prevailing high fuel taxes. JEL Classifi cation: D13, Q41