This paper estimates the potential of fuel tax reforms to curb harmful air pollutants and carbon emissions from road transport in Europe. The authors provide robust estimates for the responsiveness of fuel consumption to changes in prices, which constitute a key determinant for emissions pathways in response to policy interventions. They show that accounting for the manifest shift to diesel in the European vehicle fleet, as well as slow consumption adjustments over time yield strong evidence that petrol and diesel demand are more price elastic already in the short run than previous studies suggest. In particular, they present evidence that diesel demand in Europe tends to be more price elastic than petrol demand, when instrumenting prices with excise taxes to account for endogeneity. Inspired by recent fuel tax reform proposals, they then show that both (i) a repeal of the preferential tax treatment for diesel and (ii) an introduction of a carbon content-based tax, could avoid considerable amounts of health damaging air pollutant exhaust while at the same time contributing substantially to achieving the EU climate policy goals for 2020. In many countries, abandoning the diesel tax advantage has nearly as strong an effect as a 50€/tCO2 tax on fuel. Both reforms have significant revenue potential. The article is available for purchase on the Science Direct website or for download at the SSRN eLibrary.
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