Encouraging adoption of fuel-efficient vehicles – A policy reform evaluation from Ethiopia

The extent of vehicle ownership is increasing in many developing countries. Most of the increase takes place through import of second-hand vehicles that are usually fuel-inefficient and have poor emissions standards. This is creating enormous environmental pressures, since most developing countries also lack the necessary policies to regulate the sector. This study investigates the effect of a recent policy reform in Ethiopia that aimed at encouraging adoption of cleaner vehicles. In March 2020, Ethiopia introduced a new vehicle excise tax that linked the excise tax rate to engine size and age of vehicles, imposing lower rates on ‘fuel-efficient’ vehicles and higher rates on ‘fuel-inefficient’ ones. Exploiting the quasiexperimental nature of the reform and employing a difference-in-differences design, the study investigates the reform’s effect on vehicle ownership and composition of the vehicles, and in reducing CO2 emissions. The results show that while the reform has no significant effect on total vehicle ownership, it has a significant effect in increasing the adoption of newer vehicles. We also find no significant increase in the adoption of smaller-engine vehicles. The reformled to no significant reduction on CO2 emissions intensity of the vehicles. The reform, however, significantly increased adoption of small-engine but new vehicles - relatively the most ‘fuel-efficient’ alternatives. The results are robust to various robustness checks. The study discusses the policy implications of the results, especially for developing countries.