Should diesel cars in Europe be discouraged ? 11 August 2000

This paper examines the rationale for the different tax treatment of gasoline and diesel cars currently observed in Europe. First, we analyse possible justifications for a different tax treatment: pure tax revenue considerations, externality considerations and constraints on the tax instruments used for cars and trucks. Next, an applied general equilibrium model is used to assess the welfare effects of revenue neutral changes in the vehicle and fuel taxes on diesel and gasoline cars. The model integrates the effects on tax revenue, environmental externalities, road congestion, accidents and income distribution. ∗ Address for correspondence: Naamsestraat 69, 3000 Leuven, Belgium; e-mail: [email protected]. The research reported in this paper was financed by the Fund for Scientific Research – Flanders and the Sustainable Mobility Program initiated by the Belgian State OSTC (project MD/DD/008). We thank Alain Henry for the provision of AUTO-OIL data and Leo De Nocker and Luc Int Panis for the provision of the ExternE results for Belgium. Valuable comments by Ken Small, an anonymous reviewer and by participants at seminars in Leuven, Kopenhagen and Crete (EAERE) are gratefully acknowledged. Any errors are the sole responsibility of the authors.