Unintended Consequences of Japan’s Eco-Car Policies: Strategic Weight Manipulation and CO2 Emissions

This study evaluates the environmental effectiveness of Japan’s eco-car tax incentive program by explicitly accounting for the strategic weight manipulation by automobile manufacturers. Using monthly vehicle- level panel data from 2005 to 2021, we estimate a structural demand model for the Japanese passenger car market to examine how firms respond to weight-based fuel economy standards. Our results show that vehicles strategically adjusted to exceed regulatory weight thresholds experienced a 31% increase in relative market share, reflecting a substantial demand expansion driven by regulatory compliance rather than genuine fuel efficiency improvements. To assess the broader implications, we conduct a structural substitution counterfactual analysis comparing the observed outcomes with a no- manipulation benchmark. The counterfactual analysis reveals that strategic weight manipulation increases the sales of manipulated vehicles by 102,771 units and reduces the sales of compliant vehicles by only 3,707 units. This asymmetric displacement indicates that manipulation primarily expands overall demand rather than reallocating sales among substitutes. The resulting demand distortion produced a net increase of 133,162 tons of CO2 emissions over the sample period, substantially undermining the policy’s emissions-reduction objectives. Our findings demonstrate that weight-class-based fuel economy regulation creates strong incentives for regulatory gaming, which materially weakens environmental effectiveness. The results highlight the need for policy designs that minimize discrete eligibility thresholds and reward continuous and verifiable improvements in real-world fuel efficiency.