Fiscal incentives to consumer innovation: the use of unleaded petrol in Europe

Abstract

This paper explores the diffusion of unleaded fuel in eight European economies with the particular objective of evaluating fiscal incentives to consumer innovation as an instrument of technology policy. The unique diffusion patterns observed in each country reflect differing changes in the composition of the car stock and the choices of consumers with cars capable of using both leaded and unleaded fuel. Data restrictions limit the detailed analysis to the second of these two issues. Estimating a consumer diffusion model using Error Correction techniques the results indicate that the main driving forces (apart from changes in the composition of the car stock) have been country specific trend terms that reflect changing tastes and learning. In general, fiscal incentives have not played a major role in the diffusion process. We attribute this to the limited extent of these incentives and argue that given the estimated elasticities larger incentives would have generated a much more significant impact. Other policy conclusions are also drawn.