The Welfare Effects of Fuel Conservation Policies in a Dual-Fuel Car Market: Evidence from India

Abstract

We estimate a model of vehicle choice and kilometers driven to analyze the long-run impacts of fuel conservation policies in the Indian car market. We simulate the effects of petrol and diesel fuel taxes and a diesel car tax, taking into account their interactions with the pre-existing petrol fuel tax and car sales taxes. At levels sufficient to reduce total fuel consumption by 7%, the increased diesel and petrol fuel taxes both yield deadweight losses (net of externalities) of about 4 (2010) Rs./L. However, at levels sufficient to reduce total fuel consumption by 2%, the increased petrol fuel tax results in a deadweight loss per liter of fuel conserved that is greater than that caused by the diesel fuel tax. This reflects both the high pre-existing tax on petrol fuel and the high own-price elasticities of fuel demand in India. A tax on diesel cars that results in the same diesel market share as the large diesel fuel tax actually has a negative deadweight loss per liter of fuel conserved. The welfare effects of all three policy instruments are positive, once the external benefits of reducing fuel consumption are added to the excess burden of taxation.

A Conversation with Maureen Cropper

“…Maureen's other contributions to the economics of transportation and transportation-related externalities include a highly cited article on the impact of city shape on travel demand in the United States (Bento et al 2005) and cross-country studies (with Elizabeth Kopits) of the relationship between traffic fatalities and economic growth (Kopits & Cropper 2005. More recently, Maureen and Randy Chugh (Chugh & Cropper 2017) estimated models of vehicle choice and miles driven in the Indian car market to estimate the welfare effects of alternative policies to encourage fuel conservation-raising the tax on diesel fuel, taxing diesel cars, and raising the tax on petrol. This represents the first application of a structural model of vehicle demand in a developing-country setting.…”