Long-term responses to car-tax policies: distributional effects and reduced carbon emissions

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Staffan Algers
Shiva Habibi

We analyze the long-term effects on the car fleet and welfare distribution of three car-related policy instruments intended to reduce CO2 emissions: increased fossil-fuel taxes, an intensified bonus-malus system for new cars, and increased mandated biofuel blending. The effects on the car fleet are analyzed in terms of energy source, weight, and CO2 emissions. Distributional effects are analyzed in terms of income and geographical residence areas. The increased fuel taxes reduce CO2 emissions by 36%, mainly through less driving of fossil-fuel cars. The intensified bonus-malus system for new cars reduces CO2 emissions by 5%. Both these policies shift the car fleet toward increased shares of electric vehicles and increased average weight. Increased mandated biofuel blending has no estimated effect on the car fleet unless prices increase differently from in the reference scenario. The two first policy instruments are weakly progressive to slightly regressive over most of the income distribution, but barely regressive if the highest income group is also included. The fraction of each population group incurring substantial welfare losses is higher the lower the income group. In the geographical dimension, for all policies the rural areas bear the largest burden, small cities the second largest burden, and large cities the smallest burden. The burden in the long term versus the short term is lower for high-income earners and urban residents.

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