No Longer Rolling Dirty: The Effect of Electric Vehicle Subsidies on Automobile Markets

Abstract: Efforts to stymie greenhouse gas emissions have been multifaceted; with limiting carbon emissions from automobiles being implicated as a key tactic. We examine one approach taken by governments to steer consumers away from outmoded technologies and accelerate the adoption of green technology: subsidizing electric vehicles. While subsidies have accelerated the diffusion of EVs, the source of the change in purchase behavior remains unknown. On one hand, such subsidies might cannibalize established fossil-fuel vehicle markets. On the other hand, new markets might be emerging because of purchases made by customers who otherwise would not have purchased a vehicle. Leveraging a phased subsidy rollout at the early-stage of EV market in China and a difference-in-differences approach, we find that subsidies encouraged the purchase of EVs but had little effect on traditional vehicle sales. This suggests a market expansion effect of subsidies on green technologies during their emergence and undermines the efficacy of subsidies in accelerating the abandonment of traditional products. Further, these effects are moderated by factors that are directly related to the purpose of introducing EVs, such as severe local air pollution. Though subsidy is cost-related, we do not find a moderating effect of operating costs like gasoline price.

Keywords: Electric vehicles, diffusion of innovations, government subsidy, automobile purchase