EU Regulation of CO2 Emissions from Cars

Question OCR 2887: Discuss whether the EU should set strict regulations for CO2 emissions on new Cars? (20)

By 2012, the EU is aiming to limit pollution from cars to 130g of CO2 per kilometre.

Reasons for regulating CO2 emissions.

1. Pollution from cars is a negative externality. Driving a car causes harmful effects to a third party. These negative externalities include:

  • increased pollution leading to global warming
  • Deterioration in air quality, leading to health problems such as asthma.

In a free market, firms and consumers ignore these external costs; therefore, there is overconsumption and market failure. Firms lack incentives to develop more fuel efficient engines. Therefore, there is a strong argument for government intervention to limit pollution levels.

However, rather than set regulations, an alternative is to tax cars which emit high levels of CO2. This means firms and consumers have an incentive to buy low pollution cars. However, if consumers really want a 4*4 which pollutes a lot, they can pay the price in higher tax. As long as people are charged the social cost then it can lead to a socially efficient levels.

Also firms criticise this plan because:

  • It will lead to job losses and lower output.
  • Also they argue consumers don’t particularly want to buy these low emission engines.

However, the car firms may be exaggerating their case. Developing low pollution engines creates jobs; their will be a shift in output from 4*4s to more fuel efficient engines. An increasing number of consumers do want environmentally friendly cars.

Also increasing safety features require bigger engines and make it more difficult to meet these EU targets

With the rise in oil prices fuel efficiency is becoming more important. Consumers will want to buy cars with relatively smaller engines and therefore these emission targets may actually be easier to achieve.

General Evaluation

  • It’s difficult to measure the true social cost of CO2 emissions. It could be very high if global warming causes serious problems. Therefore, these regulations may actually be insufficient.
  • It may be good to reduce CO2 emissions, but tax and subsidies may be more effective than regulation.
By on June 13th, 2008