Combining Transportation Policies Increases Equity, Reduces Efficacy of Electric Vehicle Subsidies

A new working paper from Resources for the Future (RFF) finds that electric vehicle (EV) subsidies, when combined with other policies such as greenhouse gas and zero-emission vehicle (ZEV) standards, are less cost-effective but more equitable than they are on their own.

Subsidies for EVs have become an increasingly popular policy trend. In the United States, California, New York, and other states subsidize plug-in vehicles and set requirements for market penetration. Research examining the effects of these subsidies, however, has not previously addressed the interaction between EV subsidies and other climate policies, as well as the introduction of new EV models into the market.

The interaction between EV subsidies and other climate policies, like federal fuel economy standards, is central to understanding the adoption of plug-in vehicles. Accounting for these interactions both reduces the efficacy and increases the progressivity of EV subsidies.

The paper author, RFF Senior Fellow Joshua Linn, addressed this issue by examining the welfare and distributional effects of subsidies for EVs, using four policy scenarios that account for the interaction between subsidies, other climate policies, and new product entry.

Linn uses a model of the new vehicle market that accounts for the interactions between EV subsidies and other policies and trends in the transportation sector, including greenhouse gas and ZEV standards, new product entry, and vehicle price markups. Linn then simulates three policy scenarios: a uniform subsidy applied to all plug-in vehicles that does not differentiate between income groups or retail prices, a subsidy for the two lowest income quintiles, and a subsidy for plug-in vehicles with below-average retail prices. He also considers a tax on gasoline-powered vehicles combined with a subsidy for plug-in vehicles.

The paper yields several key findings:

Cost-effectiveness

• Subsidizing EVs for households with annual incomes below about $100,000 is at least 40 percent more cost-effective than the other subsidies. That is, income-based subsidies are more effective at boosting sales and benefiting consumers and manufacturers.
• When subsidies are implemented alongside ZEV and fuel economy standards, the subsidies are less effective at increasing plug-in vehicle sales than they are independently.
• Combining EV subsidies with taxes on gasoline-powered vehicles is more effective than offering subsidies alone.

Equity

• The uniform subsidy is actually progressive. Linn notes that this result can be explained by the differences in price sensitivity across income groups; manufacturers capture most of the subsidy for vehicles purchased by high-income consumers, while consumers capture more of the subsidy for those purchased by low-income consumers.
• Income-based subsidies are the most progressive of those studied because they are claimed by the lowest income groups and because of their interactions with ZEV standards.

“Because the requirements for zero-emission vehicles are binding, subsidies have little effect on plug-in sales in the states that have both. The ZEV policy is already doing the lion’s share of work to get vehicles on the road. In those states, the vehicles would get sold without the subsidies anyway, and the subsidies mainly shift costs of plug-ins from consumers and manufacturers to taxpayers. This reduces the cost effectiveness of the subsidies,” Linn said. “But the subsidies do benefit low-income households.”

“This is an important finding, especially for policymakers who may consider offering subsidies in addition to GHG standards and requirements for zero-emission vehicles,” Linn said.

For more, read the working paper, “Balancing Equity and Effectiveness for Electric Vehicle Subsidies” by RFF Senior Fellow Joshua Linn, or read the related blog post.