Welfare Implications of Car Feebates: A Simulation Analysis

Abstract

Vehicle taxation based on CO2 emissions is increasingly being adopted worldwide 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 cars. We estimate demand for passenger cars 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.