Fuel taxation, emissions policy, and competitive advantage in the diffusion of European diesel automobiles

Economic integration agreements have significantly decreased import tariffs. We investigate whether national policies can be an effective replacement for tariffs to protect domestic industry. We show that (a) European fuel taxes and vehicle emissions policy favored diesel vehicles, a technology popular with European consumers but largely offered only by domestic automakers; (b) European automakers benefited from pro‐diesel fuel taxes and a lenient NOx emissions policy to earn significant profits from diesel cars; and (c) that both policies amounted to significant nontariff trade policies equivalent to an import tariff between two to three times the official rate.