Cost-efficiency methodology for the selection of new car emission standards in Europe

Abstract

In the Auto-Oil Programme, the European Commission looks for emission limits for cars such that the urban air quality targets are reached at minimum cost. This optimisation problem was solved by Degraeve et al. (1998). In this paper we deal with two methodological problems in this cost efficiency approach. We study first what is known as the overachievement problem in cost-effectiveness analysis. In a pure cost-efficiency approach, there is a tendency to understate the merits of federal regulatory measures: because these measures are uniform they will always do more than required in some regions. We prove this and show how this problem can be solved using minimum information on the benefits of environmental improvements. The second problem we study is the implementation problem of local measures. From a European wide perspective, it may be cost-efficient that some regions take local measures but this is not necessary in the interest of these regions when there is transfrontier pollution. When this behavioural constraint is taken into account, the cost efficient bundle will change. We show how these two considerations affect the selection of optimal emission standards for cars in Europe.