Can financial subsidy increase electric vehicle (EV) penetration---evidence from a quasi-natural experiment

Abstract

Electric vehicles (EVs) are considered a promising solution for reducing emissions in urban transportation and addressing energy crises. Several countries, including China, have implemented direct financial subsidies to encourage the adoption of EVs. However, there is a lack of comprehensive evaluation regarding the effectiveness of these subsidies and their interaction with non-financial incentive policies. Additionally, the design of subsidy policies can be endogenous, potentially leading to biased estimations of their effects on EV penetration. To address these issues, this study utilizes a “quasi-natural experiment" approach, taking advantage of the gradual reduction of nationwide EV subsidies by the Chinese government due to financial constraints, rather than market conditions, thus mitigating the endogeneity problem. The study collects panel data from 224 prefecture-level cities in China and employs a modified panel data fixed effects model to quantify the impact of financial subsidies on EV sales and market shares. The analysis focuses on subsidy variations during six periods. The main empirical findings are as follows: (1) 1 % increase in purchase subsidies leads to a 1.36 % increase in EV sales and a 2.31 % increase in EV market share. (2) Non-financial policies, such as parking benefits, promotional goals, and restrictions on the number of vehicles, also contribute to boosting EV sales. (3) The effects of purchase subsidies vary across cities with different socio-economic conditions. (4) Some non-financial policies are found to enhance the positive effects of subsidy policies.