No. 118: Towards green driving – Income tax incentives for plug-in hybrids

Abstract

Fostering green driving has the potential to reduce the high CO2 emissions in the transportation sector. We investigate a German policy reform in 2019 that provided preferential tax treatment for hybrid company cars and evaluate the effectiveness and efficiency of the reform. Using a difference-in-differences design, we find that the tax benefit increased the number of newly registered eligible hybrid cars, compared to noneligible cars in Germany and pseudo-eligible hybrids in Austria. We find additional evidence for the effectiveness of the reform by comparing the German and the Austrian car markets in a triple-difference-in-differences setting. While the reform did help foster green driving, it was rather cost-inefficient, compared to other policy measures aiming to reduce CO2 emissions. Conducting a cost benefit analysis, we find that the cost per saved ton of CO2 was 682€.