This article reviews some of the important aspects of Japanese environmental problems caused by road transport and policies that have been proposed against them. We also report preliminary results of our research on the evaluation of various policy measures aimed at reducing CO2 emissions by automobiles. Our simulation results indicate that the ‘Green’ tax introduced in Japan in 2001 may not be effective in reducing CO2 emission while imposing large welfare costs on automobile users. The fuel tax is more cost effective than ownership and acquisition taxes. Furthermore, a revenue neutral tax policy that increases the fuel tax and reduces the ownership tax performs better than raising the ownership and the acquisition taxes.