This article examines the costs and benefits of buying a car that is more fuel-efficient.

Our findings suggest that fuel-efficient cars tend to be more expensive – a 10 per cent increase in fuel efficiency is associated with a 0.6 per cent increase in price. However, fuel savings from fuel-efficient cars, paid across the lifetime of the car, are likely to outweigh this price premium.

Taking into account the rebates and surcharges under the newly-introduced Carbon Emissions-based Vehicle Scheme (CEVS), we find that the returns to investing in a fuel-efficient car rise significantly. This suggests that the CEVS could help to incentivise more buyers to purchase fuel-efficient car models.

The views expressed in this paper are solely those of the authors and do not necessarily reflect those of the Ministry of Trade and Industry, the Economic Development Board or the Government of Singapore.

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