How much do consumers value fuel economy when buying new cars in China, the world’s largest new vehicle market? The answer to this question—at the heart of a job market paper by UMD PhD student Chang Shen—holds crucial implications for Chinese greenhouse gas (GHG) policy as the country sets its sights on peaking its emissions in 2030 and becoming carbon neutral by 2060.

China has considered many different policies to reduce GHG emissions from passenger vehicles, which account for 20 percent of the country’s carbon dioxide emissions. Proposals include reducing taxes on new cars with small engines, vehicle emissions standards, and fuel taxes. Many economists would say that of these options, fuel taxes are most cost effective because they encourage people to drive less and buy lower-emitting cars. But whether fuel taxes really are the most cost effective tool depends on how much they affect vehicle choices. If consumers don’t pay much attention to fuel economy when purchasing cars, vehicle taxes or emissions standards could be more cost effective than fuel (or carbon) taxes. As China’s car market continues to grow, it is increasingly important for policymakers to choose the most effective policy tool to combat pollution and congestion problems.

In her paper, Chang asks whether Chinese consumers fully value fuel economy when buying new cars. While some recent papers have considered this question for some high-income countries, such as the US and large European countries, evidence for lower-income countries is scarce, and nobody has looked at China—despite the fact that China’s new car market is by far the largest in the world.

To answer this question, Chang needed to test how fuel economy affects a car’s price and sales. A main strength of Chang’s paper is the price data. When she started the research, she already had information about new car registrations from 2005–2017, which covers a period in which new car demand grew explosively, by about 10-fold in just 12 years. In contrast, demand has been pretty flat on average for the United States and other high-income countries. The problem was that Chang’s data only included retail prices, analogous to sticker prices that you see on car windows at a dealership. But in China, like in the United States, negotiation between the buyer and dealer is common, and cars often sell at sizable discounts. Hence, using retail prices rather than actual transaction prices would yield misleading results.

To supplement this information, Chang found a popular (but previously unused) online source of car data that includes buyers’ reported purchase prices from 380,000 transactions since 2005. Using online website comment data and new vehicle registration data, she finds that on average, Chinese new car buyers fully value fuel economy. To see what I mean by fully valuing fuel economy, consider a consumer choosing between two hypothetical vehicles that are identical except that one gets better fuel economy and would save the consumer 1,000 yuan (=$150 dollars) over the vehicle’s lifetime. Full valuation means that the consumer would pay an extra 1,000 yuan for that second vehicle. This result holds up across a range of assumptions about consumer price responsiveness and driving. Chang also investigates how fuel economy information affects consumer choices, and you can read the full paper here.

These results mean that a gasoline tax or carbon tax could be the most cost-effective tool to reduce GHG emissions. As I mentioned earlier, we expect a fuel or carbon tax to reduce driving and increase the fuel economy of new vehicles. Even if we just consider the fuel economy channel, Chang’s research means that increasing the gas tax by 50 percent (about 2.28 yuan per liter) would reduce carbon dioxide emissions by 7 percent. This is a promising policy result that can help China fulfill its pledge to peak its GHG emissions by 2030.