Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: The extent of vehicle ownership is increasing in many

developing countries. Most of the increase takes place

through import of second-hand vehicles that are usually

fuel-inefficient and have poor emissions standards. This is

creating enormous environmental pressures, since most

developing countries also lack the necessary policies to

regulate the sector. This study investigates the effect of

a recent policy reform in Ethiopia that aimed at

encouraging adoption of cleaner vehicles. In March 2020,

Ethiopia introduced a new vehicle excise tax that linked the

excise tax rate to engine size and age of vehicles,

imposing lower rates on ‘fuel-efficient’ vehicles and higher

rates on ‘fuel-inefficient’ ones. Exploiting the

quasiexperimental nature of the reform and employing a

difference-in-differences design, the study investigates the

reform’s effect on vehicle ownership and composition of the

vehicles, and in reducing CO2 emissions. The results show

that while the reform has no significant effect on total

vehicle ownership, it has a significant effect in increasing

the adoption of newer vehicles. We also find no significant

increase in the adoption of smaller-engine vehicles. The

reformled to no significant reduction on CO2 emissions

intensity of the vehicles. The reform, however,

significantly increased adoption of small-engine but new

vehicles - relatively the most ‘fuel-efficient’

alternatives. The results are robust to various robustness

checks. The study discusses the policy implications of the

results, especially for developing countries.

Keywords: transportation; environment; policy instruments; developing countries

JEL-codes: H23; Q40; Q58

Language: English

64 pages, November 2023

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