The Implications of Preexisting Market Power Distortions for Electric Vehicle Tax Policies: Evidence from Colombia

New vehicle markets in developing countries are characterized by low-income consumers and highly concentrated markets that distort equilibrium markups, which increases the challenges of transitioning to electric vehicles. We analyze existing and proposed policies aiming to increase hybrid and electric vehicle sales in Colombia. Using highly detailed data on vehicle purchases and attributes, we estimate an equilibrium model of Colombia’s market that includes a random-coefficients logit demand structure and endogenizes firms’ markups. Using the model to simulate policies indicates that Colombia’s sales tax and import tariffs have increased hybrid and electric vehicle market shares by 0.9 to 2.7 percentage points at welfare costs of 40–48 USD per ton of carbon dioxide reduction. Potentially taxing new vehicle carbon dioxide emissions rates would have roughly similar welfare costs. High welfare costs arise from exacerbating preexisting distortions caused by variable equilibrium markups.