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EMAC 2024 Annual


An environmental feebate policy in the car market and its effects on pollution and welfare
(A2024-119586)

Published: May 28, 2024

AUTHORS

Yanai Ankaoua, Ben-Gurion University of the Negev; Stav Rosenzweig, Ben-Gurion University of the Negev; Ofir Rubin, Ben-Gurion University of the Negev; Aviv Steren, Ben-Gurion University of the Negev; Ziv Bar-Nahum, The Hebrew University of Jerusalem

ABSTRACT

Countries implement environmental feebate programs, imposing high taxes on new high-emission cars and offering rebates for low-emission ones. However, it is unclear whether these programs support environmental goals and enhance overall welfare. While similar policy measures in several countries aimed at reducing only CO2 emissions, we examine a policy in Israel, that was more comprehensive in that it included all five key car pollutants. Analyzing data from 2010 to 2018, we use a differentiated products model and simulate market outcomes without the feebate. We find that under the feebate, retail prices rose and sales dropped, yielding lower consumer and higher manufacturer surpluses. Surprisingly, emissions have increased. We show a positive association between the size of the rebate on a car and the manufacturer’s markup. This finding suggests that manufacturers took advantage of environmental policy to increase markups.