Title: Strategic incentives for a policy mix in the international car market
Authors: Benoot, Wim
Proost, Stef
Issue Date: Jul-2014
Publisher: KU Leuven, CES
Series Title: CES - Discussion paper series, DPS14.23 pages:1-41
Abstract: The paper analyses the strategic environmental policy choices of governments for the car market. We consider two countries that each have a small number of car producers who sell cars at home and abroad, there are cross border pollution externalities and cross border R&D externalities. Each government can set a fuel tax and a fuel emission standard but tariffs are not allowed. We show that the symmetric cooperative equilibrium will have a fuel tax lower than global environmental damage and the fuel standard may not be needed as instrument. The symmetric non-cooperative fuel tax equals the local environmental damage. Non-cooperative governments always prefer to use a fuel tax rather than a fuel efficiency standard as the fuel tax allows to tax foreign profits. When car manufacturing is concentrated in only one country, the car importing country will opt for a higher fuel tax. The role of the fuel efficiency standard is enhanced when there is only a small number of producers, when there is a higher spill over rate and when crude oil prices are lower. The results are illustrated with a simple numerical model for the car market.
Publication status: published
KU Leuven publication type: IR
Appears in Collections:Research Center of Energy, Transport and Environment, Leuven

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