Research Insight | How Are Electric Vehicle Subsidies Affecting the Automobile Market?
Researchers examined whether purchase subsidies for electric vehicles (EVs) steered consumers away from outmoded technologies and accelerated the adoption of green technologies. In general, the authors found that subsidies strongly encouraged EV purchasing but had little effect on the purchases of traditional vehicles.
EV manufacturers’ marketing campaigns should target two independent consumer segments: those likely to purchase an additional vehicle and those who would not otherwise purchase a vehicle—especially those with higher environmental awareness in both segments.
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What You Need to Know
- In general, purchase subsidies for electric vehicles strongly encourage electric vehicle purchases (i.e., the expansion effect) but have so far had little effect on traditional vehicle purchasing (i.e., cannibalization).
- The expansion effect of subsidies is larger in areas with more severe air pollution.
- Although subsidies have yet to yield the intended cannibalization in the market overall (especially when the market is still developing), cannibalization is beginning to manifest in some parts of the market, for example, in segments with higher income and education.
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.
Xi Wu, Jing Gong, Brad N. Greenwood, and Yiping (Amy) Song (2023), “The Effect of Early Electric Vehicle Subsidies on the Automobile Market,” Journal of Public Policy & Marketing, 42 (2), 169–86.