Europe's car market long overdue for fuel-efficiency fix

In today's Financial Times, Jos Dings, director of T&E, writes:

The failure of carmakers to live up to the commitment they made to the European Union to improve the fuel efficiency of new cars highlights a clear case of market failure. Regulation is therefore a first best, not the "third-best policy" as you describe it in your editorial "Curbing emissions" (February 12).

The market has failed for two reasons. New car buyers tend to be either rich or do not pay their own fuel bills, or both. Therefore they are less swayed by fuel efficiency than the average driver who buys his (or her) car second-hand.

The 18m cars sold each year in Europe are, therefore, less fuel-efficient than the average driver wants.

Second, even those new car buyers who do consider fuel costs do not calculate that a 25 per cent more fuel-efficient car means a €5,000 saving on fuel bills over the lifetime of the car, let alone the benefits to the climate of 25 per cent lower emissions. Consumers are short-sighted when it comes to lifetime costs as Gillette and the makers of inkjet printers will attest.

The FT prefers a tax on emissions because it offers an incentive. But regulation of fuel efficiency can also be based on incentives. An example is the benchmark-and-trade regulation for new cars proposed by the state of California and currently blocked by Big Auto, which prefers George W. Bush to set the standard.

Europe already has fuel taxes. And some governments base their car taxes on CO2. Raising of the former and wider implementation of the latter would certainly help. But it is not a question of taxes or regulation. The answer is surely both. The fact that Europe is the last major car market in the world without fuel-efficiency standards has created a big problem that is long overdue a fix.

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