Most common policies that bear CO2-emissions in name are registration and annual car taxes (or bonuses). Table
A2 in the Appendix summarizes the prevalence of these schemes in the EU countries. Out of 27 EU countries,
13 have a one-time car registration tax and 15 have an annual car tax (nine countries have both). While the specific
tax designs differ, the size of all these taxes are (co-)determined by CO2 emissions. Such taxes, however, affect the
marginal costs of car ownership (per year), rather than the marginal costs of emitting CO2—once paid they become
a sunk cost and thus are irrelevant with respect to decisions whether to drive an additional journey, or whether to
save on fuel consumption or not. In addition, while these taxes give people incentives to buy fuel efficient cars, the
related savings on fuel as well as savings on the car tax itself after a car is bought represent a positive income shock.
This may increase the number of kilometers driven and weaken incentives to save on fuel consumption. As a result,
at least part of the positive effects of these taxes on CO2 emissions gets crowded out. These taxes are thus hardly
optimal with respect giving correct incentives to curb CO2 emissions.5