No. 118: Towards Green Driving? Income Tax Incentives for Company Cars

We examine the real effects and cost-efficiency of a targeted policy designed to pro-mote low-emission corporate mobility. Specifically, we study a German reform that introduced a preferential income tax treatment for plug-in hybrid and electric company cars. Using a difference-in-differences design, we identify its causal impact on the sustainability of corporate fleets and compare car models eligible for the preferential tax treatment in Germany with the same models in the neighboring country Austria. Our findings indicate that the tax benefit increases the number of newly registered eligible cars by 95%. This finding is robust to several robustness checks, including a triple difference-in-differences specification. A cost-benefit analysis reveals that the reform is cost-inefficient from a government perspective, with estimated costs of 1,266 € per saved ton of carbon dioxide (CO2), substantially exceeding those of comparable transport-sector measures. We also assess the reform’s implications for firms and estimate substantial abatement costs of 1,302 € per saved ton of corporate emissions. We show that the costs for both the government and firms would substantially decrease if the electric driving share of plug-in hybrids would be increased or only purely electric cars were eligible for the preferential tax treatment.