Introducing an emission reducing policy in the European car market

Because of an increased awareness of global warming problems, the European Union has recently adopted the Kyoto protocol, thereby committing itself to reduce the carbon dioxide emissions. One of the main sectors a¤ected by the new environmental policy is the automobile market. In this paper we study the economic e¤ects of the proposed emission standard policy and compare it with several alternative policies. We \u85rst specify and estimate a di¤erentiated products oligopoly model for the car market. We subsequently use these estimates to perform our policy simulations. The preliminary results indicate that the currently proposed emission standard policy would lead to a reduction in emissions by between 4.9 and 8.5 million tons. At the same time, this policy would lead to a change in consumer surplus, producer surplus and tax revenues of between 2.0 and 8.5 billion Euro. Finally, we compare the standards policy with an alternative emission tax policy that reduces total emissions by the same amount. We nd that the tax policy leads to more negative changes in surplus and revenues of between-10.6 and-18.3 billion Euro. JEL classi\u85cations: Q53, L13, L62. I would like to thank my supervisor Frank Verboven for many helpful comments and support. I woul