Research

This paper examines the role of electric and hybrid vehicles (EVs) in firms' compliance with European emission standards. Although these standards lower average fleet emissions, counterfactual simulations show that total CO2 emissions would be about 1% lower without electric vehicles and hybrids. Although manufacturers use these technologies to meet regulatory targets, this allows them to continue to sell higher-emission vehicles, which limits overall emissions reductions. The results highlight inherent weaknesses in fleet-average regulation and the need for complementary policies to drive deeper decarbonization.

Emission standards are now binding in the European passenger vehicle market, forcing firms to adjust prices and products strategically. Using a structural model that incorporates compliance cost uncertainty and smooths kinked profit functions, we show that tighter standards triggered substantial price changes, with many vehicles sold at or below marginal cost. Counterfactuals reveal heterogeneous welfare effects: emissions fell, but consumer losses were significant and varied across countries with different preferences and vehicle profiles. Our framework provides a general tool for analyzing the market and welfare consequences of binding environmental regulations under strategic firm behavior.

This article evaluates if and to which extent policy can steer innovation towards eco-friendly technologies. We construct a cross-country dataset on sectoral green innovation and complement it with data on policies designed to address environmental market failures: environmental taxes, regulation, and R&D subsidies. While all of these tools exert a positive effect on green innovation, our IV estimates reveal substantial heterogeneities across policies. Overall, green innovation reacts most strongly to R&D subsidies for renewables, but interaction effects between different policies need to be considered.