Biofuels, Climate Policy, and the European Vehicle Fleet

We examine the effect of biofuels mandates and climate policy on the European vehicle fleet, in particular the prospects for diesel and gasoline vehicles. Our analysis is based on a dynamic computable general equilibrium model of the world economy which explicitly incorporates current generation biofuels, accounts for stock turnover of the vehicle fleets, disaggregates gasoline and diesel cars, and represents an advanced E85 vehicle. We find that the European vehicle fleet is robust to proposed biofuels mandates owing to an existing fuel tax and tariffs structure that favours diesel vehicles. Harmonising excise duties on diesel and gasoline or lowering tariffs on biofuel imports, however, is shown to reverse the trend toward more diesel vehicles and significantly alters the efficiency costs and environmental effectiveness of renewable fuel policies.