A French government scheme to encourage the purchase of less environmentally damaging cars succeeded in getting consumers to switch to greener vehicles. But it was less effective in reducing the average level of emissions of carbon dioxide per kilometre driven since there was a net increase in sales of new cars. These are among the conclusions of research by Xavier D”Haultfoeuille, Pauline Givord and Xavier Boutin, published in the August 2014 issue of the Economic Journal.
Their study sheds light on the many channels through which fiscal incentives at the product level may affect carbon emissions. It shows that such incentives can work to modify the demand for new cars substantially. But it also emphasises that while these so-called ”feebates” may be efficient tools for reducing carbon emissions, they should be designed carefully to achieve their primary goal.
The Bonus/Malus, an innovative fiscal system for the purchase of new cars, was first introduced in France in 2008 with the intention of contributing to a reduction in the nation”s carbon emissions. The feebate scheme offered a one-shot tax cut of up to €1,000 for purchases of cars with low levels of carbon emissions, whereas the most polluting cars were subject to taxation of up to €2,600.
At the outset, the system was a considerable success in changing the pattern of new car purchases. The share of cars emitting fewer than 120g of carbon per km rose from 20% at the end of 2007 to 32% in January 2008 – and overall, the proportion doubled in a few months. Over the same period, the share of new cars emitting between 166g and 200g (broadly speaking, family cars) halved.
But the average level of emissions per kilometre moved less drastically. First, the average emissions per kilometre for new cars are affected by ”threshold effects”: customers tend to prefer cars just below the threshold to cars just above. Second, the composition of the stock of all cars evolves more slowly than the composition of the flow of new cars. Overall though, the feebate system still unambiguously decreased the per car average emissions per kilometre.
Nevertheless, other factors have to be taken into account to evaluate the impact of the feebate scheme, even in the short run. The size of the existing stock, its composition and mileage per car are also crucial parameters. Moreover, the effect on the sales of new cars has to be taken into account since producing cars is also a polluting activity.
This research uses data on car registrations and the results of France”s national survey on transport and travel to carry out a first comprehensive analysis of the 2008 feebate system. In the short run, the system in its 2008 version would have increased total carbon emissions by about 170 kilotonnes per quarter – that is, an increase of 1.2%. This result is mainly driven by the net increase in sales of new cars.
Estimating the long-run effect of this policy is more delicate and much more sensitive to various assumptions about the composition of the stock of cars and about drivers” behaviour. It is also a purely theoretical exercise as the system has been progressively modified and tightened since 2009.
If the 2008 version of the feebate had continued and customers” reaction stayed the same, the overall impact would have been very negative, mainly because of the growth in the stock of cars induced by the reduced net prices of entry-level, low polluting cars. With a tighter feebate scheme and the same consumer response, the measure would have been much closer to neutrality in terms of carbon emissions.
Other factors should be taken into account in a comprehensive long-term assessment, but they are difficult to quantify. For example, the system could have induced a reaction among car manufacturers, encouraging the design of less polluting models. It is also possible that customers over-reacted to what they expected to be a temporary measure.
”The Environmental Effect of Green Taxation: The Case of the French Bonus/Malus” by Xavier D”Haultfoeuille, Pauline Givord and Xavier Boutin is published in the August 2014 issue of the Economic Journal. Xavier D”Haultfoeuille is at CREST. Pauline Givord is at INSEE. Xavier Boutin is in DG Competition at the European Commission.