Vehicle taxes as a climate policy instrument: econometric evidence from Spain

We study the local distortionary effects of notches in Spain’s CO2-based vehicle registration tax on the distribution of new car CO2 performance. These effects are the smoking gun of carmaker strategic behaviour and affect in turn tax revenue and CO2 emissions. Using model-level data on all car registrations in Spain 2010-2020, we apply the bunching approach to the three thresholds of the tax scheme: 120, 160, and 200 gCO2/km. We find that the tax notches strongly affected market outcomes, resulting in the sale of about 388,000 more cars (overall) at or just below the thresholds compared to the respective counterfactuals without the thresholds. This translates into about €335 million of foregone tax revenue and only very limited extra abatement of CO2 emissions. Over 90-95% of all estimated bunching took place at the first threshold (120 gCO2/km). Over 60% of all estimated bunching took place before 2015. Bunching diminished over time, which reflects diminished effectiveness of the tax in both reducing CO2 emissions and generating revenue. Taking the interactions with both EU vehicle emission standards and similar CO2-related policies in other Member States into consideration is important for interpreting these results.