The internalisation of external costs of CO₂ and pollutant emissions from passenger cars

Abstract

The paper's goal is to unify practical and theoretical aspects of internalisation of external costs, in line with the “polluter pays” and “user pays” principles. Due to the impossibility of applying an ideal economic solution for internalisation of external costs, alternative solutions have to be developed and implemented. One of the possible solutions for internalisation of external costs of CO₂ and pollutant emissions from passenger cars is presented in this paper. It is a new methodology for calculating annual circulation taxes on passenger cars. This methodology, besides CO₂, also takes into account the pollutants whose emissions are regulated by the Euro standards (CO, HC, NO_x and PM), as well as the vehicle age and kilometres driven. The proposed methodology has been tested on some of the best-selling passenger cars in Europe. The results of analysis show significant differences between our methodology and the methodologies that are used in five European countries (Ireland, the United Kingdom, Malta, Luxembourg and Sweden), which use the CO₂ emissions as a reference value for their calculation. Also, we have proved that the annual circulation tax, calculated using our methodology, provide better internalisation of external costs compared to the fuel tax.

Keywords:

• external cost
• annual circulation tax
• passenger cars
• emissions
• CO₂
• pollutants
• vehicle age
• kilometres driven

JEL Classification:

• H21
• H23
• R48