Performance evaluation and improvement for ZEV credit regulation in a competitive environment

Abstract

The Zero Emission Vehicle (ZEV) credit regulation and its variants are now widely implemented in automobile industry to promote electric vehicle (EV) production with the ultimate goal of reducing emissions from motor vehicles. In this work, we study how the ZEV credit regulation affects competition between automobile manufacturers and stakeholder payoffs in a Nash game. We find that the ZEV regulation can indeed reduce the total emission. However, when the ZEV regulation becomes more stringent, it fails to further promote and even discourages EV production—the production quantity of EVs is always decreasing, and the market share of EVs can be reduced. Consequently, if the ZEV regulation becomes tightened, which is really happening in reality, a manufacturer that used to produce EVs may now stop EV production, other than fuel vehicle production. We then propose a modified ZEV regulation, in which the aforementioned adverse effect is eliminated such that a more stringent regulation can encourage manufacturers to produce more EVs and increase the market share of EVs. We also show that these results remain valid, when the unit credit trading price is endogenized or when there are multiple competing manufacturers in the market. Our findings have practical implications for policymakers to improve the ZEV credit regulation.