All car taxes are not created equal: Evidence from Germany

Economic theory suggests that the environmental externalities created by driving cars can be corrected by imposing taxes. In this paper we focus on one possible such tax, namely an annual registration fee that grows with the CO2 emissions rate of a vehicle. Taxes of this kind have been adopted in recent years in countries with important car markets, including Germany. We ask three research questions. First, how effective is this type of tax at redirecting new cars towards models with lower emissions rates? Second, are these effects stable over time? Third, when new information is issued about the true CO2 emissions rates of cars, how does the car market process that information? We use monthly new car sales from Germany from January 2011 to March 2019, a period during which the tax was revised three times. The first two revisions tightened the threshold above which a car's emissions are penalized; with the third, the car's emissions rate changes, due to the adoption of a new testing procedure, the Worldwide Harmonised Light Vehicles Test Procedure (WLTP). We find that new car sales are affected by the tax. Our models ascribe to the tax 2–5% reductions in new car sales. Focusing on specific periods around the time of the tax revisions results in higher estimated tax elasticities (−0.12 to −0.31), and efforts to match cars with emissions rates just below the threshold with similar vehicles just above the thresholds results in even stronger elasticities (−0.122 to −0.563, depending on the period). The resulting effect on the average CO2 emissions rate is, however, small. When we separate the tax amount into the previous tax plus the shock due to the switch to the WLTP test procedure, we find that the market is insensitive to the tax shock, but processes fully the corresponding change in the fuel economy of the vehicle. Much literature has focused on whether consumers discount very heavily or neglect the future costs of owning a car, compared to the price they pay for it. We find that even within future costs, some appear to be more salient than others.