Preference or technology? Evidence from the automobile industry

Abstract

Which comes first in reducing the Carbon Dioxide (CO2) emissions from the transportation sector: consumer preference or technological advancement? Using a series of discrete-choice demand models, we estimate the demand for automobiles in Japan. Our model explicitly allows consumer preferences for fuel economy to evolve over time, and the estimation results confirm the existence of such a change. We then simulate consumer behavior, enabling consumers in 2010 to choose automobiles from 2016, and vice versa. The results imply that both consumer preferences and technological advancement are important—without technological advancement and increases in consumers’ appreciation for fuel-efficient cars, CO2 emissions cannot be reduced.