Vehicle adoption and the bonusmalus policy in Sweden; what is the impact on economic welfare?

Abstract

There is an emerging clarity of the need to reduce emissions, but emission-reducing policies often appear to decrease welfare. In Sweden, the bonus-malus policy was introduced to promote the adoption of electric vehicles (EVs) and plug-in hybrid vehicles (PHVs), while discouraging the adoption of internal combustion engine vehicles (ICEVs) by subsidizing EVs and PHVs and taxing ICEVs. This study investigates the impact of the bonus-malus policy and vehicle adoption on economic welfare in Sweden. Monthly and regional data on new passenger car registrations were collected, and the corresponding taxes and subsidies were calculated based on the type of fuel powering the vehicle. Gross regional product (GRP) per capita was used as a proxy for economic welfare. An instrumental variable (IV) approach was employed to isolate the effect of vehicle adoption on GRP, with the bonus-malus policy serving as the instrument and vehicle adoption as the instrumented variable. Two specifications were made. The first investigates the effect of total vehicle adoption on GRP using a binary variable indicating the presence of the policy. The second examines the impact of ICEV, EV, and PHV adoption on GRP through the average tax on ICEVs (separately for petrol and diesel vehicles) and the average bonus on EVs and PHVs. The results indicate that the binary bonus-malus instrument, representing the presence of the policy, has a significant effect: the policy decreases vehicle adoption by an average of 56 vehicles per region annually. However, when examining the specific effects of the bonus and malus on vehicle adoption by fuel type, the results are more uncertain and sometimes counterintuitive. The effect on economic welfare is also uncertain, as no significant results were found. While the bonus-malus policy appears to reduce the overall adoption rate of new vehicles, its impact on welfare remains unclear.