Response of new car buyers to alternative energy policies: The role of vehicle use heterogeneity

This paper compares two policy instruments, fuel taxes and fuel economy-based vehicle purchase taxes, in terms of their effectiveness in stimulating the purchase of cleaner cars. The paper highlights that accounting for vehicle use heterogeneity is crucial for recovering new car buyers' valuation of expected fuel cost savings from improved vehicle fuel efficiency. Combining a random coefficients logit demand model with a unified data source for car choice and subsequent car usage from Massachusetts, I find little evidence of consumer myopia. In policy counterfactuals, high-mileage drivers are more responsive to tax changes than low-mileage drivers. Moreover, high-mileage drivers are more responsive to changes in fuel taxes than fuel economy-based vehicle purchase taxes. Therefore, fuel taxes are more effective in switching new car buyers to fuel-efficient vehicles for fuel savings and emissions reductions. Importantly, the same implication holds when considering a non-zero elasticity of demand for driving to vehicle fuel efficiency.

Automated summary

This study compares the effectiveness of two policy instruments, fuel taxes and fuel economy-based vehicle purchase taxes, in promoting the purchase of cleaner cars. The findings highlight the importance of accounting for heterogeneity in vehicle use to understand new car buyers' valuation of fuel cost savings from improved fuel efficiency. The results show that high-mileage drivers are more responsive to tax changes and fuel taxes are more effective in encouraging the switch to fuel-efficient vehicles for fuel savings and emissions reductions, even when considering the elasticity of demand for driving to vehicle fuel efficiency.