The Impact of the Low-Cost Green Car (LCGC) program on the domestic market and export of passenger cars in Indonesia

Abstract

Concerns over greenhouse gases (GHG) and energy security have led countries to create automotive development policies that promote green development, sustainable growth, and industrial upgrading. In 2013, the Indonesian Government introduced the Low-Cost Green Cars (LCGC) program as a fiscal incentive policy targeting the development of fuel-efficient and low-emission small passenger cars with an internal combustion engine (ICE). This research exploits the LCGC program incentive to a particular car model as an instrument to find the program’s effect on the domestic market, production, and export. The difference in difference (DD) model is used to study the effect by comparing the similar vehicle segment in the control group that is not covered by tax incentives. The combination of the DD method with the initial matching design is intended to minimize bias. The monthly and annual panel data of sales, production, export, and other variables are used from 2011 to 2015 to examine pre and postintervention effects. The result shows that the LCGC program significantly increases domestic market sales and production in all models. Meantime, its impact on export is also shown to positive but it is relatively small compared to those on domestic sales and production. The analytic results generally indicate that the LCGC program with fiscal incentive policy succeeded in boosting the domestic market, production, and export of eco-friendly and low-cost small passenger vehicles.