Media Briefings

SWEDEN’S ‘GREEN CAR REBATE’: The impact on the environment and the market for new cars

  • Published Date: August 2014

An environmental policy in Sweden aimed at buyers and manufacturers of new cars reduced the market share of Swedish and German firms producing high-end, high-emission petrol cars. It also led to a decrease in lifetime carbon emissions, which is particularly desirable in a country where passenger car emissions are significantly higher than the average for the European Union (EU).

These are among the findings of research on the ‘green car rebate’ (GCR) by Cristian Huse and Claudio Lucinda, published in the August 2014 issue of the Economic Journal. The GCR consisted of a 10,000 Swedish krona ($1,400) rebate paid to consumers purchasing environmentally friendly (‘green’) cars.

Two features distinguish the GCR from policies elsewhere. First, the GCR was broad in that green cars commanded a 25% share of the new car market. Second, the GCR relied on alternative (renewable) fuels to achieve its aims.

Cars that were eligible for the GCR belong to two categories: those able to run only on fossil (‘regular’) fuels had to emit at most 120gCO2/km, while those able to run on alternative fuels (mostly ethanol) were given a more lenient treatment, roughly 220gCO2/km. Thus, two-thirds of the green cars registered in 2008 were able to operate using renewable fuels. Among these, the dominant ones were FFVs (flexible-fuel vehicles), which seamlessly operate using any combination of ethanol and petrol.

The researchers estimate an economic model for the Swedish car market and evaluate counterfactual (‘what-if’) scenarios to examine the effects of the GCR on carbon savings plus the market shares of certain brands and fuel segments. This makes it possible to evaluate the role of the skew towards renewables and how the programme affected different carmakers.

Among the findings on the environmental impact of the policy:

· The GCR resulted in a decrease in lifetime carbon emissions, with a cost lower than estimates for the US market yet higher than the price of European emission permits and the social cost of carbon.

· But the FFV technology allows switching between gasoline and petrol. Accounting for this results in non-trivial cost increases – that is, the FFV technology makes fuel choice an additional dimension to be taken into account in policy design.

· Removing the asymmetry of the GCR would result in lower carbon savings but also a lower cost. Importantly, since such a policy would not contemplate FFVs, fuel switching does not affect the cost of the policy.

Among the findings on the market impact of the policy:

· High-emission vehicles suffered ever-increasing competition from fuel segments benefiting from the GCR. The main brands losing out from the policy were Swedish and (high-end) German carmakers, all with a strong presence in the high-emission petrol segment.

· A symmetric version of the GCR would make Saab and high-end German brands better off compared with the actual policy. Importantly, the market share of FFVs would decrease by less than 0.4 percentage points, which suggests that consumers would have purchased FFVs regardless of the policy.

The researchers note that policy-makers worldwide face the challenge of designing efficient environmental policies. Besides navigating the waters of politics, they need to take account of how consumers and firms are likely to react to a policy, how technologies are affected by regulation and how they in turn shape its outcomes.

Within the EU, passenger cars are responsible for about 12% (an eighth) of the overall emissions of carbon, but this share is a much higher 19% (nearly a fifth) in Sweden, as its car fleet has average carbon emissions lower only than those of Estonia and Latvia. Reducing emissions from passenger cars is thus essential for Sweden to meet EU-wide environmental goals.

ENDS


Notes for editors: ‘The Market Impact and the Cost of Environmental Policy: Evidence from the Swedish Green Car Rebate’ by Cristian Huse and Claudio Lucinda is published in the August 2014 issue of the Economic Journal.

Cristian Huse is at the Stockholm School of Economics. Claudio Lucinda is at the University of Sao Paulo.

For further information: contact Cristian Huse on +55 21 981 976 586 (email: cristian.huse@sse.edu); Claudio Lucinda on +55 11 989 282 250 (email: claudiolucinda@usp.br); or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).