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

תקציר

During August 2009, a “green taxation” reform was introduced in Israel. The reform included raising the purchase tax on new cars from 72% to 83% and giving rebates to consumers based on the emissions level of the vehicle. This scheme is similar to other “feebate” systems around the globe. In this study, we estimate the demand equation for a new car, subject to various segments and cross elasticities, with the nested logit model. We 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, we 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 the number of new car purchases. When keeping the number of new car purchases constant by simultaneously reducing the purchase tax on new cars, we 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. We also find that maximum revenues from taxation (the peak of the Laffer Curve) are gained when the purchase tax is 99%, which is equivalent to a 44.98% tax on the final new car price, and that the new green score update, which reduced rebates beginning in January 2015, is similar to an increase of 3.35% in purchase tax.