Do the Baltic States need to tax passenger cars more

Energy and carbon intensities in the Baltics are among the highest in the EU, in particular in transport. Next to low fuel taxes, the likely reason is that Estonia and Lithuania do not apply any car tax while the purchase of corporate passenger cars benefits from VAT deductibility in Estonia and Latvia. In order to reduce the welfare losses of the current setup, this note argues that there is a strong case for applying fiscal measures aimed at reducing CO2 emission by passenger cars. The policy mix should take into account country-specific characteristics like e.g. purchasing power, availability of public transport, or the need to renew the currently rather old car fleets.