Tax incentives to reduce energy consumption
Two cantonal policy measures to cut energy consumption did not have the intended effects. These policy measures are the vehicle tax incentives of several cantons and Basel’s electricity levy.
Background (completed research project)
The Energy Strategy 2050 originally involved a second phase with an emphasis on incentive based policy measures to reduce energy consumption. The main idea of the research project was to draw lessons from cantonal experiences with such measures for the national level. Even with the second phase of the Energy Strategy 2050 shelved, these lessons should continue to be of value over time.
The aim was to assess the effects of two cantonal policy measures. First, several cantons introduced vehicle tax incentives for fuel efficient and/or clean cars. In a first subproject, the effects of these incentives on vehicle choice were investigated. Because increases in fuel efficiency lower the cost of driving, vehicle tax incentives may have the unintended consequence of generating additional traffic. Therefore, the effect of the vehicle tax incentives on driving behaviour was also examined. Second, Basel introduced an electricity levy in 1999, which substantially increased marginal electricity prices for households and most businesses. In a second subproject, the effect of this electricity levy on aggregate electricity consumption was investigated.
People buying a car potentially consider vehicle characteristics, prices and taxes from a large number of car models, and different people may evaluate these aspects differently. A structural econometric model was used that allowed to reliably estimate the influence of vehicle taxes despite the large number of car models and personal differences. This model was combined with an empirical approach able to eliminate unobserved confounding factors that differ across cantons or years. Using these methods together with data on vehicle registrations, cantonal vehicle taxes and vehicle characteristics it was found that cantonal vehicle taxes and corresponding incentives for fuel efficient and/or clean cars did not have the intended effect on vehicle choice. In addition, no effect of vehicle tax incentives on driving behaviour was observed.
To estimate the effect of Basel’s electricity levy, the actual electricity consumption in Basel after the introduction of the levy was compared with the electricity consumption in the hypothetical situation without the levy. The electricity consumption in this hypothetical situation was approximated with the electricity consumption in comparable cities. Instead of arbitrarily choosing some comparison cities, a weighted average of the electricity consumption in those cities was used. The weights were chosen so as to make the electricity consumption and its determinants in the 14 years before the levy’s introduction as similar as possible to what was observed in Basel. According to the results achieved, Basel’s electricity levy did not significantly reduce aggregate electricity consumption.
Relevance for research
The results are highly context-specific. They do not imply that incentives in the energy sector are generally ineffective. However, they are consistent with previous findings showing that vehicle tax incentives spread over many years may be less effective and that individuals react to average prices, when it comes to electricity consumption, not the theoretically more relevant marginal prices.
Relevance for practice
To be effective, incentives should be felt immediately and have clear and unambiguous effects on prices. Further, insufficient information may have contributed to the ineffectiveness of some cantonal policies.
Tax incentives for reducing energy consumption: An empirical evaluation of tax reforms in Swiss cantons