Consumer purchases of energy-efficient cars: behavioural implications for policy

Improved energy efficiency can help reduce pollution, contribute to energy security, and help consumers save money. This paper explores car purchasing behaviour in order to draw implications for designing policies that will increase the demand for energy-efficient cars. To that end we calculate own and cross price elasticities of demand for cars with efficiency labels in the Spanish car market. The results show that the elasticities depend on assumptions about how consumers decide what car to purchase. If consumers are concerned about the absolute energy performance of cars independently of other attributes, demand for more efficient cars is more elastic than demand for less efficient cars. If consumers choose the car segment first and then the energy performance, the opposite result is found. The results suggest that both relative and absolute labelling schemes can be useful, depending on how consumers make their decisions. It might also be possible to design a mixed system.