Environmental and welfare effects of vehicle purchase tax: Evidence from China

• Published in: Energy economics 2022-11, Vol.115, p.106377, Article 106377
• Main Authors: Ji, Qing, Wang, Chunan, Fan, Ying
• Format: Article
• Language: English
• Subjects: Battery electric vehicles; Environment; Internal combustion engine vehicles; Purchase tax; Social welfare
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2022.106377

We investigate how an increase in the rate of purchase tax for internal combustion engine vehicles (ICEVs) in China affects sales of ICEVs and battery electric vehicles (BEVs), environmental externalities of CO2 and PM2.5 emissions and social welfare. By building a random-coefficients discrete choice model based on the brand-level sales data and conducting counterfactual analyses, we find that, first, the own-price elasticity of market shares of ICEVs and BEVs are −3.07 and −2.93, respectively. Second, the increase in purchase tax rate by 2.5% for ICEVs with a displacement no higher than 1.6 L in 2017 has reduced the environmental externalities caused by CO2 and PM2.5 emissions. Third, the welfare effect depends crucially on the definition of social welfare and the assumptions about vehicle lifetime and manufacturers' pricing decisions. Finally, several policy implications are discussed. •We study how purchase tax reform affects environment and social welfare.•We estimate a BLP model and conduct counterfactual analyses.•The degree of substitution between ICEVs and BEVs in China is low.•The purchase tax reform reduces environmental externalities substantially.•The welfare effect is sensitive to a number of assumptions.