Engine-Specific Tax Program

This paper investigates the effectiveness of engine-specific tax programs that are widely used in developing countries to contain car carbon emissions. Using the largest national tax abatement program for small displacement vehicles in 2015 and administrative data in China, our study identifies significant price and sales responses for both small and large displacement vehicles, indicating strong competition spillovers across the markets. The quantification model shows that an increase in car ownership generates more car emissions than the reduction saved by the relocation from large to small displacement vehicles. Welfare analysis further shows that the reduced government tax revenue and increased car emissions significantly outweigh the increased household welfare and firm profits, rendering the engine-specific tax program socially unbeneficial.