Welfare Effects of Fuel Tax and Feebate Policies in the Japanese New Car Market

This paper examines the efficiency and distributional effects of the fuel tax and feebate policies. I employ a model with households' two-stage decisions on car ownership and utilization and estimate model parameters by combining micro-level data from a household survey and macro-level aggregate data for the Japanese new car markets from 2006 through 2013, with a car price endogeneity being dealt with. Counterfactual analyses show that the Japanese feebate results in a significant increase in social welfare while augmenting environmental externalities. In particular, the rebound effect induced by the feebate cancels out about 7% of the reduction in CO2 emissions that would originally have been attained by the fuel economy improvement. In addition, I find that the fuel tax at the current tax rate in Japan is 1.7 times less costly than the product tax, an alternative feebate scheme considered in the counterfactuals, in all income classes to reduce environmental externalities by the same amount, with no difference between the regressivity of the two policies.