The Effect of Income on Vehicle Demand: Evidence from China's New Vehicle Market

Abstract

Growth of private vehicle ownership in low-income and emerging countries is a dominant factor in forecasts of global oil demand and greenhouse gas emissions. Countries such as China are expected to experience rapid income growth over the next few decades, but little causal evidence exists on its effect on car ownership in these countries. Using city-level data on new car sales and income from 2005 to 2017, and using export-led growth to isolate plausibly exogenous income variation, we estimate an elasticity of new car sales to income of about 2.5. This estimate indicates that recent projections of vehicle sales in China have understated actual sales by 36 percent and carbon dioxide emissions by 18 million metric tons in 2017. The results suggest that, to meet its climate objectives, China’s climate policies will need to be substantially more aggressive than previous forecasts indicate. *Linn: University of Maryland and Resources for the Future (linn@umd.edu). Shen: University of Maryland. The authors thank Anna Alberini, Jim Archsmith, Erich Battistin, Jing Cai, and Cinzia Cirilo for helpful comments.