Do Engine-Specific Tax Programs Work? A Structural Analysis of Market Spillovers and Welfare Implications

Abstract

This paper examines engine-specific tax programs that are widely used in developing countries to limit car emissions. Using China's tax abatement program for small vehicles in 2015, we find significant price and sales responses for both small and large vehicles, indicating strong competition spillovers. The quantification model shows that an increase in car ownership generates more car emissions than the reduction resulting from the relocation from large to small vehicles. Welfare analysis further shows that the reduced government tax revenue and increased car emissions significantly outweigh the increased household welfare and firm profits, rendering the engine-specific tax program socially unbeneficial.