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In Europe, while diesel motor cars were a minor part of the fleet at the beginning of the eighties, they account for nearly 40% of current fleet. The reason behind this replacement effect is twofold: first, diesel cars exhibit higher fuel efficiency (liters/km) than gasoline cars (17% on average), and second most governments in Western EU countries have designed tax rates that are lenientwith the consumption of diesel fuel, thus generating an extra stimulus to use diesel cars. However, given that the amount of CO2 is higher for diesel fuel than for gasoline fuel (15%), in this paper we analyze whether the design of this dieselization policy in Europe is optimal. First, the empirical evidence suggests that the benefits in fuel cons umption and CO2 emissions induced by the switch towards diesel motor cars (liters/km.) has been dampened by the induced rebound effect motivated by a more intensive use of diesel motor cars (km. travelled). Second, we build on an aggregate DSGE model that makes distinction of diesel motor and gasoline motor vehicles, and calibrate it for the EU. This helps us to explain the replacement effect, and the rebound effects in mileage, fuel expenditures and CO2 emissions. Third, from a normative view, the model leads to recommend setting the fuel tax rates according to the amount of carbon of the fuel, which is a 15% higher for the diesel fuel, and not according to the fuel efficiency. This implies that fuel tax rates should be 15% higher for diesel fuel than for gasoline fuel. Yet Pigouvian sale taxes should be nil. These recommendations are radically different to current tax design for passenger cars in Europe.