Do policies promoting the transition to low-carbon vehicles lead to distributional injustice?

ABSTRACT

Because private vehicles are among the most polluting consumer goods, countries implement feebate programs, imposing high taxes on high-emission vehicles and offering rebates for low-emission ones. As global car markets are characterized by manufacturers’ excessive market power, such policies might cause distributional injustices. We examine a feebate policy aimed at reducing carbon emissions similar to policies introduced in several countries around the same time. Employing a differentiated products model, we evaluate market equilibrium comparing the real-world scenario—where the decarbonization policy was implemented—with a simulated no-policy scenario. Findings reveal that the policy led to distributional injustices, where (1) manufacturers’ welfare increased and they effectively hindered consumer accessibility to efficient vehicles, (2) despite public financing, consumer welfare decreased as affordability of low-carbon vehicles did not increase as planned, and (3) surprisingly, emissions did not decrease. We suggest confronting strategic manufacturer behavior to promote a just transition to low-carbon car markets.