A Small-Scale Microeconomic Model for Policy Evaluation - Evaluating Measures to Combat Global Warming in the Passenger Vehicle Sector

The purpose of this paper is to elucidate a method for constructing a small-scale policy evaluation model that is applicable to assessing actual policies. The approach adopted in the paper is to construct a perfectly consistent small-scale model adopting the user-friendly CES function, while maintaining the flexibility required for policy evaluation.



Measures taken in the passenger vehicle sector to combat global warming were adopted as an example for the policy evaluation model. Part one elucidates the method for constructing a small-scale policy evaluation model using a CES utility function with a simple one-period model. Part two expands the model over multiple periods, making it sufficiently practicable for policy evaluation. Even this multi-period model, however, has a simple structure that enables it to be used by policy makers and consultants who have studied basic microeconomics and econometrics.



Passenger vehicle CO2 emissions are currently one of the fastest-growing factors contributing to emission of greenhouse gases in Japan, and measures to reduce them are a key policy issue. This paper evaluates the policy of adopting a vehicle tax system to reduce CO2 emission volumes from passenger vehicles.



According to the results of the simulation conducted for this paper, taxes on fuel are more effective in reducing CO2 emissions than taxes on vehicle acquisition or ownership. Policies that heavily tax acquisition or ownership of fuel-inefficient cars while maintaining revenue neutrality, such as "green" taxes, have scarcely any effect on reduction of emissions (approximately 0.1%). Although increased fuel taxes are relatively effective, they do not have a significant effect in absolute terms. When simply increasing fuel taxes, a hike of 25 yen per liter over existing prices is desirable, but since the fuel price elasticity of vehicle travel is minimal (about 0.2), the effect on reduction of CO2 emissions is also small at around 4.3% and the net social benefit of the change in the tax regime is limited to around 360 yen per vehicle per anum.



Since existing taxes on acquisition and ownership are skewed, a revenue-neutral tax reform that combined higher fuel tax with lower ownership tax would create benefits close to the optimum. The optimal level of tax increase would be 45 yen per liter, which would bring about a reduction in CO2 emissions of approximately 5.4% and net social benefit of around 1,200 yen per vehicle per anum.