Fuel consumption elasticities, rebound effect and feebate effectiveness in the Indian and Chinese new car markets

TL;DR

This study analyzes how new car buyers in China and India respond to policy levers affecting fuel consumption, revealing low elasticity, significant rebound effects, and limited effectiveness of feebate policies in reducing fuel use.

Contribution

It provides the first joint discrete-continuous model of car choice and usage in India and China, estimating responsiveness, rebound effects, and policy impacts using survey data.

Findings

Fuel consumption is relatively unresponsive to fuel price and income.

Rebound effects are approximately 17-19% in both markets.

Feebate policies yield minimal fuel savings and have limited effectiveness.

Abstract

China and India, the world's two most populous developing economies, are also among the world's largest automotive markets and carbon emitters. To reduce carbon emissions from the passenger car sector, both countries have considered various policy levers affecting fuel prices, car prices and fuel economy. This study estimates the responsiveness of new car buyers in China and India to such policy levers and drivers including income. Furthermore, we estimate the potential for rebound effect and the effectiveness of a feebate policy. To accomplish this, we developed a joint discrete-continuous model of car choice and usage based on revealed preference survey data from approximately 8000 new car buyers from India and China who purchased cars in 2016-17. Conditional on buying a new car, the fuel consumption in both markets is found to be relatively unresponsive to fuel price and income, with magnitudes of elasticity estimates ranging from 0.12 to 0.15. For both markets, the mean segment-level direct elasticities of fuel consumption relative to car price and fuel economy range from 0.57 to 0.65. The rebound effect on fuel savings due to cost-free fuel economy improvement is found to be 17.1% for India and 18.8% for China. A revenue-neutral feebate policy, with average rebates and fees of up to around 15% of the retail price, resulted in fuel savings of around 0.7% for both markets. While the feebate policy's rebound effect is low - 7.3% for India and 1.6% for China - it does not appear to be an effective fuel conservation policy.