Are policies promoting the transition to low-carbon vehicles associated with distributional injustice?

• We examine associations between low-carbon car policies and distributional injustice. • We compare market outcomes under differentiated tax policy vs. no-policy scenario. • The policy led to distributional injustice as manufacturers exploited market power. • Consequently, consumer surplus declined while emissions dropped only marginally. • Findings suggest that market power could have hindered the policy’s full potential. Are policies that encourage the transition to a low-carbon economy associated with distributional injustice? Governments often use differentiated vehicle taxes to encourage the shift toward lower-emission cars. As car markets are characterized by manufacturers’ market power, such policies can generate distributional injustices, namely, unjust distribution of welfare across consumers, producers, and the environment. We examine whether such a policy delivered a just transition to low-carbon vehicles by comparing equilibrium under policy vs. a no-policy counterfactual. We find evidence of distributional injustices under the policy: (1) manufacturers captured substantial benefits by increasing markups on low-carbon vehicles, (2) despite public financing, affordability of low-carbon vehicles did not improve as planned, and consumer surplus declined, and (3) emissions decreased only marginally. We suggest reinstating a uniform vehicle tax, paired with sales requirements for low-carbon vehicles imposed on manufacturers. This combination would likely curb manufacturers’ appropriation of consumer surplus and support a just transition.