Environmental, Redistributive, and Revenue Effects of Policies Promoting Fuel-Efficient and Electric Vehicles

We analyze welfare implications of policies promoting environmentally friendly vehicles, employing rich Swiss microdata on 23,000 newly purchased cars and their buyers and random coefficients choice models. We compute substitution patterns across fuel types and wealth quartiles and document heterogeneity in preferences for electric vehicles (EVs) between wealth groups. Based on our estimated parameters we suggest optimal combinations of EV subsidies and vehicle tax ”feebate” schemes that safeguard road infrastructure financing, while meeting a prespecified EV market share, preserving consumer welfare and taking equity considerations into account. We document a pathway for the social planner to substantially decrease CO2 emissions of the new car fleet without jeopardizing road infrastructure revenue by switching from the current regime to a policy mix of EV price subsidies coupled with a fuel-efficiency-oriented vehicle tax scheme.