The Economics of Electric Vehicles

Abstract

Electric vehicles (EVs) powered by renewable electricity are a centerpiece of efforts to decarbonize transportation. EV advocates also claim benefits from local pollution reductions, lower life-cycle costs to consumers, and improved energy security. We examine the theory and evidence behind these claims and evaluate when the market will produce the optimal path of EV adoption. Optimal EV policy is nuanced. While EVs driven in some locations reduce pollution, they increase pollution in others. While many consumers enjoy cost savings from EVs, some experience net benefits from choosing gasoline-powered cars, even after accounting for EV subsidies. And depending on the dynamic benefits of stimulating EV adoption today, optimal policy might front-load stimulus, even though the environmental benefits of EV adoption are likely to increase over time as electricity grids become cleaner. Reflecting these nuances, the policy landscape is complicated and often creates conflicting incentives for EV adoption in regions with ambitious adoption goals. We highlight several themes for policy design, including 1) promoting regional variation in EV policies that align private incentives with social benefits, 2) pursuing a time-path of policies that follows the trajectory of marginal benefits, and 3) rationalizing electricity and gasoline prices to reflect their social marginal cost. On the extensive margin, purchase incentives should ramp-down as learning-by-doing and network externalities that may exist diminish; on the intensive margin, gasoline should become relative more expensive than electricity (per mile traveled) to reflect cleaner marginal emissions from electricity generation.