The German eco tax and its impact on CO2 emissions

Many countries have only recently introduced carbon taxation to reduce emissions and the time series data for evaluating these policies is not available yet. We use the introduction of fossil taxes in the German transportation sector to evaluate the effectiveness of environmental taxation. We employ synthetic control methods in the quantitative section of our analysis. The results indicate that the carbon price increase by about 66 euro/t CO2 led to a considerable decline of transport emissions by 0.2-0.35 t per person and year. We also show that the sales share of diesel cars quickly increases after the reform, whereas the fuel efficiency of non-diesel cars increases with a three-year time lag. Most importantly, a qualitative analysis of a German car manufacturer's business reports also suggests that the tax triggered an improvement in engine technology.