Welfare and Environmental Benefits of Electric Vehicle Tax Policies in DevelopingCountries : Evidence from Colombia

Developing countries face a major challenge of decarbonizing their light-duty vehicle fleetand transitioning to the broad use of electric vehicles. However, there is little evidence on which policies can mosteffectively facilitate that transition in these countries, distinguished by relatively low-income consumers and highlyconcentrated markets that distort vehicle markups. This paper analyzes existing and proposed policies aiming toreduce emissions from new passenger vehicles in Colombia, which has used preferential sales taxes and import tariffsto stimulate hybrid and electric cars sales. Using highly detailed data on vehicle purchases and attributes, the paperestimates an equilibrium model of Colombia’s market that includes a random-coefficients logit demand structure andendogenizes firms’ markups. Using the model to simulate policies, the analysis finds that Colombia’s sales tax andimport tariffs have increased hybrid and electric vehicle market shares by 0.9 to 2.7 percentage points at welfarecosts of $40-$48 per ton of carbon dioxide reduction. Potentially taxing carbon dioxide emissions rates of newvehicles would have roughly similar welfare costs. The high welfare costs of these policies arise from preexistingdistortions caused by market power, which yields large private welfare costs of shifting from gasoline to hybridand electric vehicles.