The Market Impact and the Cost of Environmental Policy: Evidence from the Swedish Green Car Rebate

Huse, Cristian and Lucinda, Claudio (2013): The Market Impact and the Cost of Environmental Policy: Evidence from the Swedish Green Car Rebate. Forthcoming in: Economic Journal

Abstract

We quantify the effects of the Swedish GCR, a program to reduce oil dependence and greenhouse gas emissions in the automobile industry. We find the GCR to increase the market shares of `green cars' and its cost to be $109/tonCO2 saved, thus 5 times the price of an emission permit. Since the main green cars in Sweden are FFVs (flexible-fuel vehicles), which can switch between petrol (gasoline) and ethanol, we also account for fuel choice, which increases the cost of the program. Finally, we show that consumers would have purchased FFVs regardless of the rebate provided by the GCR.

• Item Type: MPRA Paper
• Language: English
• Keywords: CO2 emissions; Ethanol; Environmental policy; Flexible-fuel vehicles; Fuel economy; Green Car; Governmental policy; Greenhouse gases; Renewable fuels.
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L6 - Industry Studies: Manufacturing > L62 - Automobiles ; Other Transportation Equipment ; Related Parts and Equipment; L - Industrial Organization > L7 - Industry Studies: Primary Products and Construction > L71 - Mining, Extraction, and Refining: Hydrocarbon Fuels; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L98 - Government Policy; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q42 - Alternative Energy Sources; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q48 - Government Policy

References

References ACEA (2008). The automobile industry pocket guide, Retrieved from http://www.acea.be.

References Environmental and Economic Effects of CO2-based Automobile Taxes in Germany. Working paper.

References Aldy, J., A. J. Krupnick, R. Newell, W. H. Parry and W. A. Pizer (2010). “Designing Climate Mitigation Policy”, Journal of Economic Literature 48 (4), 903-934.

References Anderson, S. T. (2012). “The Demand for Ethanol as a Gasoline Substitute”, Journal of Environmental Economics and Management 63 (2), 151-168.

References Anderson, S., I. Parry, J. M. Sallee, and C. Fischer (2011). “Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives”, forthcoming Review of Environmental Economics.

References Anderson, S., and J. Sallee (2011). Using Loopholes to Reveal the Marginal Cost of Regulation: The Case of Fuel-Economy Standards, American Economic Review 101, 1375-1409.

References Bento, A., L. Goulder, M. Jacobsen, and R. von Haefen (2009). “Distributional and efficiency impacts of increased U.S. gasoline taxes”, American Economic Review 99, 667-699.

References Beresteanu, A. and S. Li (2011). “Gasoline Prices, Government Support, and the Demand for Hybrid Vehicles”. International Economic Review 52(1): 161-182.

References Berry, S. (1994). “Estimating Discrete-Choice Models of Product Differentiation”, The RAND Journal of Economics 25 (2), 242-262.

References Berry, S., S. Kortum and A. Pakes (1996). “Environmental Change and Hedonic Cost Functions for Automobiles”. Proceedings of the National Academy of Sciences, 12731-12738.

References Berry, S., J. Levinsohn and A. Pakes (1995). “Automobile Prices in Market Equilibrium”, Econometrica 63, 841-890.

References BEST (2009). Promoting clean cars, Project title: BioEthanol for Sustainable Transport, Project report, Retrieved from: http://www.best-europe.org/

References BIL Sweden (2010). Svensk Fordonsindustri Faktablad.

References Boyer, M. and J-J Laffont (1999). “Toward a Political Theory of the emergence of Environmental Incentive Regulation”. The RAND Journal of Economics 30 (1): 137-157.

References Bresnahan, T. F., S. Stern and M. Trajtenberg (1997). “Market Segmentation and the sources of Rents from Innovation: Personal Computers in the Late 1980s”, RAND Journal of Economics 28 (0), S17-44.

References Chandra, A., S. Gulati and M. Kandlikar (2010). “Green Drivers or Free Riders? An Analysis of Tax Rebates for Hybrid Vehicles”, Journal of Environmental Economics and Management 60(2), 78-93.

References EFTE (2009). Reducing CO2 Emissions from New Cars: A Study of Major Car Manufacturers' Progress in 2008. Brussels, Belgium. European Federation for Transport and Environment

References European Energy Exchange (2009). Retrieved from: http://www.eex.com/

References Goldberg, P.K. and F. Verboven (2001). “The Evolution of Price Dispersion in the European car market”, Review of Economic Studies, 68, 811-848.

References Gollop, F. M. and M. J. Roberts (1983). “Environmental Regulations and Productivity Growth: The Case of Fossil-Fueled Electric Power Generation”. Journal of Political Economy 91(4), 654-674.

References Gowrisankaran, G. and M. Rysman (2011). “Dynamics of Consumer Demand for New Durable Goods”. Working paper.

References Hall, George J. (2000). “Non-convex costs and capital utilization: A study of production scheduling at automobile assembly plants”. Journal of Monetary Economics 45, 681-716.

References Harrington, W., I. Parry and M. Walls (2007). “Automobile Externalities and Policies”, Journal of Economic Literature 45, 374-400.

References Hendel, I. and A. Nevo (2006). “Measuring the Implications of Sales and Consumer Inventory Behavior”, Econometrica 74 (6), 1637-1673.

References Huse, C. (2012). “Fast and Furious (and Dirty): How Asymmetric Regulation May Hinder Environmental Policy”. Working paper.

References Huse, C. and N. Koptyug (2012). “Bailing On The Car That Wasn't Bailed Out: Explaining Consumer Reactions to Financial Distress”. Working paper.

References Huse, C. and N. Koptyug (2012b). “Cars as Options? Quantifying the Value of Multifuel Technologies”, presented at the Annual Meeting of the Brazilian Econometric Society.

References IEA (2011a). CO2 Emissions from Fuel Combustion. Paris, France. International Energy Agency.

References IEA (2011b). World Economic Outlook. Paris, France. International Energy Agency.

References Klier, T., and J. Linn (2010). “The Price of Gasoline and New Vehicle Fuel Economy: Evidence from Monthly Sales Data”, American Economic Journal: Economic Policy 2 (3), 134-153.

References Klier, T. and J. Linn (2011). “New Vehicle Characteristics and the Cost of the Corporate Average Fuel Economy Standard”, forthcoming at the RAND Journal of Economics.

References Laffont, J-J. and J. Tirole (1991). “The Politics of Government Decision-Making: A Theory of Regulatory Capture”, The Quarterly Journal of Economics 106(4), 1089-1127.

References Li, S., J. Linn, and E. Spiller (2011). “Evaluating “Cash-for-Clunkers”: Program Effects on Auto Sales and the Environment”, RFF Discussion Paper 10-39-Rev.

References Li, S., C. Timmins, and R. von Haefen (2009). “How Do Gasoline Prices Affect Fleet Fuel Economy?”, American Economic Journal: Economic Policy 1, 113-137.

References Mandell, S. (2008). “Carbon Emission Values in Cost Benefit Analyses”, Transport Policy 18(6) 888-892.

References Metcalf, G. (2008). “Using Tax Expenditures to Achieve Energy Policy Goals”, American Economic Review Papers and Proceedings 98, 90-94.

References Miljöfordon.se (2009). Retrieved from: http://www.miljofordon.se

References Ministry of the Environment (2007). Press release: The Government introduces a green car rebate, Retrieved from: http://www.regeringen.se/sb/d/586/a/79866

References Ministry of the Environment (2008a). Press release: Regeringen avsätter mer pengar till miljöbilspremien, Retrieved from: http://www.regeringen.se/sb/d/119/a/101932

References Ministry of the Environment (2008b). Press release: Klimat- och energisatsningar i budgetpropositionen 2009, Retrieved from: http://www.regeringen.se/sb/d/119/a/110590

References Ministry of the Environment (2009). Press release: New green cars to be exempted from vehicle tax, Retrieved from: http://www.regeringen.se/sb/d/11760/a/122175

References Parry, I. W. H., M. Walls, and W. Harrington (2007). “Automobile Externalities and Policies”, Journal of Economic Literature 45 (2), 373–399.

References Reiss, P. C., and F. A. Wolak (2007). Structural Econometric Modeling: Rationales and Examples from Industrial Organization. In Handbook of Econometrics, Vol. 6A.

References Ricardo, D. (1817). On the Principles of Political Economy and Taxation. In The Works and Correspondence of David Ricardo, ed. P. Sraffa. Cambridge: Cambridge University Press, 1951.

References Ryan, S. P. (2011). “The Costs of Environmental Regulation in a Concentrated Industry”, forthcoming Econometrica.

References Sallee, J. (2011a). “The Taxation of Fuel Economy”, in Tax Policy and the Economy v. 25, Editor Jeffrey R. Brown, NBER: University of Chicago Press, 1-38.

References Salvo, A., and C. Huse (2011). “Is Arbitrage Tying the Price of Ethanol to that of Gasoline? Evidence from the Uptake of the Flexible-Fuel Technology”, Energy Journal 32 (3), 119-148.

References Salvo, A., and C. Huse (2013). “Build it, but will they come? Evidence from consumer choice between gasoline and sugarcane ethanol”. Working paper.

References SFS (2005). Lag (2005:1248) om skyldighet att tillhandahålla förnybara drivmedel, Retrieved from: http://www.riksdagen.se/Webbnav/index.aspx?nid=3911&bet=2005:1248

References SFS (2007). Förordning (2007:380) om miljöbilspremie, Retrieved from: http://www.riksdagen.se/Webbnav/index.aspx?nid=3911&bet=2007%3A380

References The New York Times (1989). “Autos Cry for Alcohol; France Will Do Its Part”. Edition of 30 December 1989.

References The Swedish Consumer Agency (2004-2009). Nybildguiden (The New Car Guide).

References The Swedish Environmental Protection Agency (2008a). Index över nya bilars miljöpåverkan 2007, Retrieved from: http://www.naturvardsverket.se/

References The Swedish Environmental Protection Agency (2008b). Allmänhetens kunskaper och attityder till klimatförändringen (tidigare växthuseffekten), Retrieved from: http://www.naturvardsverket.se/

References The Swedish Petroleum Institute (2009a). Försäljningsställen av motorbränslen, Retrieved from: http://www.spi.se/fsg.asp?cboFromYr=2009&cboToYr=2009&cboCompany=<Alla>&cboCategory=<Alla>

References The Swedish Petroleum Institute (2009b). Leveranser bränslen per månad, Retrieved on May 18, 2009 from: http://www.spi.se/statistik.asp?art=99

References The Swedish Tax Agency (2009). FAQ on vehicle tax, Retrieved from: http://www.skatteverket.se/funktioner/svarpavanligafragor/privat/fordonsskatt/allafragorochsvar.4.5cbdbba811c9a768f0c80005626.html

References Trafikverket (2011). Uppdaterade reduktionsvärden för etanol- och gasfordon till bilindex. Retrieved from http://www.trafikverket.se/PageFiles/25435/nov10/04-2011_PM%20uppdaterade%20reduktionsv%C3%A4rden110308.pdf

References Train, K. and Winston, S. (2007). “Vehicle Choice Behavior And The Declining Market Share Of U.S. Automakers”, International Economic Review 48(4), 1469-1496.