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

Overview

This research investigates the distributional consequences of differentiated vehicle tax policies designed to incentivize transitions to low-carbon automobiles. The study examines whether such policies achieve equitable outcomes across consumers, manufacturers, and environmental objectives by comparing market equilibria under differentiated tax regimes against counterfactual no-policy scenarios. The analysis centers on how manufacturer market power potentially undermines policy effectiveness and distributional fairness.

Methods and approach

The research employs equilibrium comparative analysis between differentiated tax policy implementation and counterfactual scenarios without policy intervention. The methodology involves quantifying market outcomes including manufacturer markups, consumer surplus, vehicle affordability metrics, and emissions reductions. The analytical framework accounts for oligopolistic manufacturer behavior and strategic pricing responses to tax-induced demand shifts, enabling assessment of welfare distribution across market participants and environmental outcomes.

Key Findings

The differentiated tax policy generated distributional injustices characterized by three primary findings: manufacturers substantially increased markups on low-carbon vehicles, capturing significant consumer surplus despite public financing mechanisms; vehicle affordability improvements failed to materialize as anticipated, resulting in net consumer surplus decline; and emissions reductions remained marginal relative to policy objectives. These outcomes reflect manufacturers' exploitation of market power to appropriate benefits intended for consumers and environmental objectives.

Implications

The findings demonstrate that differentiated taxation alone proves insufficient for achieving just transitions in concentrated vehicle markets. Manufacturer market power constitutes a structural constraint on policy efficacy, necessitating complementary regulatory mechanisms. The research suggests combining uniform vehicle taxation with mandatory manufacturer sales requirements for low-carbon vehicles as an alternative policy architecture. This approach would address markup appropriation while maintaining volume incentives for low-carbon production. Policy design for sectoral decarbonization requires explicit consideration of market structure and firm behavior beyond demand-side incentive mechanisms.