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Green Taxation: The Influence and Desirability of the Feebate Scheme in the Israeli New Car Market

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Document pages: 34 pages

Abstract: In August 2009, a “green taxation” reform was introduced in Israel. The reform included raising the purchase tax on new cars and giving rebates to consumers based on the emissions level of the vehicle. This scheme is similar to other “Feebate” systems around the world. In this study, I estimate the demand equation for a new car, subject to various segments and cross elasticities, using a nested logit model. I find that price and emissions level have a negative influence on a car’s market share, while “efficiency” and “safety” have a positive influence. Moreover, the cross-elasticity of “car model” is higher between cars from the same segment. Using the coefficients of these regressions, I then simulate the effect of removing the green rebate. Excluding the green rebate increases both public revenues from taxation and the emissions from new cars, while also reducing new car purchases. When keeping the number of new car purchases constant by simultaneously reducing the purchase tax on new cars, I find that public taxation revenues and emission levels rise. However, the cost estimation of the additional externalities from emissions is significantly lower than the revenue lost when keeping the green taxation rebate constant, which puts the desirability of the program in question from a government perspective. I also find that the green score update, which reduced rebates beginning in January 2015, could not be replaced by a reduction in the purchase tax, and that maximum revenues from taxation (Laffer Curve s peak) are obtained when the purchase tax is 99 percent (before the green rebate), making total tax payment (including VAT) 44.98 percent of the final average new car price.

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