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

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 PM_2.5 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 PM_2.5 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.