Environmental impact of a green tax on new vehicle sales in the presence of tax exemptions

At the end of 2014 a “Green” registration tax on new vehicle sales was introduced in Chile. In this paper we use a vehicle registration dataset to estimate the impact of this policy on average nitrogen oxide (NOx) emission rates of new vehicle purchases. We analyze two impact channels: substitution from diesel to gasoline vehicles and substitution from more to less polluting models within each fuel class. We rely on a difference-in-differences approach and focus our analysis on pickup trucks. Our identification strategy benefits from the fact that for this type of vehicle the policy defined a taxable and exempt group. In addition, the tax was increased on two occasions after its implementation, hence we can estimate its impact as a function of treatment intensity. Our findings suggest that an average tax that reached 7-8% of the sale price resulted in an overall increase of 4 to 8 percentage points in the probability of purchasing a gasoline over a diesel pickup truck for affected purchases, reducing the average emission rate for this class of vehicles. In addition, we find suggestive evidence that within the diesel pickup group the tax may have induced a substitution to a cleaner model once it became available in the market. The policy’s aggregate environmental impact is small since a large fraction of the most polluting vehicles are exempt. Finally, we do not find evidence of an increase in CO2 emissions as a result of the tax. Policy recommendations are discussed.