DP13756 Abatement Strategies and the Cost of Environmental Regulation: Emission Standards on the European Car Market

Author(s): Mathias Reynaert
Publication Date: May 2019
Date Revised: May 2019
Keyword(s): automobiles, Carbon Emissions, compliance, Environmental Regulation, fuel economy
JEL(s): L5, Q5
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13756

Emission standards are a major policy tool to reduce greenhouse gas emissions from transportation. The welfare effects from this type of regulation depend on how firms choose to abate emissions, i.e., by sales-mixing (changing prices), by downsizing (releasing smaller cars), by technology adoption or by gaming emission tests. Using panel data covering 1998-2011, I find that the introduction of a EU-wide emission standard coincides with a 14% drop in emission ratings. I find that this drop is fully explained by technology adoption and gaming and not by sales mixing or downsizing. I estimate a structural model to find that the regulation missed its emission target and was not welfare improving. Abatement with sales mixing would have reduced emissions, but at high costs. The political environment in the EU shaped the design and weak enforcement of the regulation and explains the choices for abatement by technology adoption and gaming.