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Looking for a distorted market? Come to Italy

Two years ago the Italian government made a bold move to promote sales of cars that use environmentally friendly fuels.

The government offered incentives of up to 2,000 euros ($2,590) to new-car buyers who chose models fueled by liquid petroleum gas (LPG) and up to 3,500 euros ($4,530) for compressed natural gas (CNG).

Many Italians welcomed the subsidies, which were announced as a long-term strategy to reduce the country's dependence on imported oil and to slash carbon-dioxide emissions from vehicles.

It turns out the subsidies were a short-term tactical move to revive ailing car sales. The Italian government phased out the incentives on March 31 and now LPG and CNG sales are falling steeply.

In April, sales of vehicles powered by LPG fell to 10.5 percent of total market volume from just over 25 percent in March. CNG vehicle sales tumbled to just over 1 percent from a 5.7 percent share in March.

LPG sales were still significant in April just because dealers had to clean their inventories. To shift the cars off the lots, many dealers gave away the LPG system, equivalent to a 1,500 euros ($1,980) discount.

The subsidies distorted consumer demand with gas-fueled vehicles accounting at one point for more than 30 percent of Italian car sales in the first quarter.

When the incentives ended, so did Italians' love of cars fueled by gas. As inventories are realigned to real demand, combined CNG and LPG sales will return the pre-incentive level of about 6 percent of the market total.

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