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

Abstract

Global efforts to stymie greenhouse gas emissions have been diverse and multifaceted; with limiting carbon emissions from internal combustion automobiles being implicated as a key tactic. In this work, we examine one approach taken by governments to steer consumers away from traditional vehicles and accelerate the diffusion of green technologies: subsidizing the purchase of electric automobiles. While many subsidies have accelerated the diffusion of EVs, the source of the change in purchase behavior remains unknown. On the one hand, as policymakers hope, such subsidies might be cannibalizing established fossil-fuel vehicle markets, i.e. cannibalization. On the other hand, new markets might be emerging as a result of purchases made by customers who otherwise would not have purchased a vehicle, i.e. market expansion. Leveraging the phased rollout of an electric vehicle subsidy in China, we find that subsidies strongly encourage EV purchase, but yield no notable effect on traditional vehicle purchasing. This suggests a market expansion effect and undermines the efficacy of subsidies in slowing traditional vehicle sales; indicating that while subsidies can accelerate the diffusion and adoption of de novo technologies, the abandonment of outmoded technologies is not guaranteed. Further, we find these effects are moderated by non-pecuniary motivations, viz. air pollution. Theoretical and practical implications are discussed within.