The Effect of Early Electric Vehicle Subsidies on the Automobile Market

Abstract

Subsidies have become increasingly popular for policy makers to promote the adoption of ecofriendly new technologies. Normally, the costs of these subsidies are nontrivial, underscoring the need to determine their efficacy. This work examines one subsidy used to steer consumers away from outmoded technologies and accelerate the adoption of green technologies: purchase subsidies for electric vehicles (EVs). On the one hand, such subsidies might cannibalize the market for traditional vehicles. On the other hand, such subsidies may result in overall market expansion, with little effect on traditional vehicle purchasing. Leveraging a phased subsidy rollout aimed at the early-stage EV market in China and a difference-in-differences approach, the authors find that subsidies strongly encourage EV purchasing but have little effect on traditional vehicle purchasing. This suggests that market expansion may result from the subsidy during the EV emergence and undermines the expected cannibalization on the traditional market. Further, the expansion effect is larger in cities with more severe air pollution. Finally, results reveal some level of cannibalization in cities of higher income and educational attainment. This suggests that although subsidies have yet to yield the intended cannibalization for the market overall, it is beginning to manifest in some parts of the market.