Welfare Implications of Automobile Feebates: A Simulation Analysis

Abstract

Vehicle taxation based on CO2 emissions is increasingly being adopted worldwide in order to shift consumer purchases to low-carbon cars, yet evidence on its effectiveness and economic impact is limited. We focus on feebate schemes, which impose a fee on high-carbon vehicles and give a rebate to low-carbon automobiles. We estimate demand for automobiles in Germany and simulate the impact of alternative feebate schemes on emissions, consumer welfare, public revenues and firm profits. We find that revenue-neutral feebate schemes are welfare-decreasing; welfare can only increase with schemes that increase tax revenues at the expense of consumer and producer surplus.