Welfare Analysis of Government Subsidy Programs for Fuel-Efficient Vehicles and New Energy Vehicles in China

Abstract

To address energy security and environmental problems, the Chinese government has issued various subsidy programs for fuel-efficient vehicles and new energy vehicles (NEVs). This paper investigates the effectiveness and welfare consequences of (1) the vehicle and vessel usage tax incentive (VVUT-incentive), (2) the fuel-efficient vehicle subsidy program (FEV-subsidy program), and (3) the NEV private purchase subsidy pilot program (NEV-subsidy program). From car registration data for Shanghai, Changchun, Hangzhou, Hefei, and Shenzhen from 2011 to 2012, we estimate a random coefficient discrete choice model and conduct a counterfactual analysis based on the estimated parameters. The empirical findings suggest that these policies promote the diffusion of fuel-efficient vehicles and NEVs and improve fleet fuel efficiency. However, the VVUT-incentive and FEV-subsidy program increase oil consumption and CO2 emissions. Although the NEV-subsidy program decreases gas consumption, it increases CO2 emissions. We also show that the VVUT-incentive and FEV-subsidy program improve welfare conditions. However, the NEV-subsidy program compromises social welfare, as losses of government revenue exceed consumer surplus gains.