Subsidies for electric vehicles: not such a good idea after all!
Published on 03/28/2023
Published on 03/28/2023
Grants for buying electric vehicles (EVs) boost sales wherever they are introduced. And yet a study by four co-authors, including Yiping (Amy) Song from NEOMA Business School, reveals that the market for conventional (combustion engine) vehicles shows no signs of shrinking. In short, these subsidy programmes, which are costly for governments (and, by extension, the taxpayer), have no impact on greenhouse gas emissions. Does that mean it’s time to take a fresh look at EV grants?
It’s an idea so commonplace that it seems blatantly obvious: subsidies for purchasing electric cars is good for the climate since “clean” vehicles supplant polluting models.
And yet this theory has been demolished by four researchers investigating the Chinese auto industry, the world’s largest market for EVs. The team focused on 2010-2015, a five-year period when people in China were offered grants in over 80 cities countrywide as part of the Electric Vehicle Subsidy Scheme (EVSS).
On the surface, it was a strategy that worked to perfection: EV sales jumped by 250% on average, with an even bigger hike in cities with the highest pollution rates. But sales of conventional vehicles remained more or less static, including in the heavily polluted cities or towns where fuel prices were sharpest.
In other words, the EV market doesn’t eat into the market for traditional vehicles; in fact, it extends the market, inflates sales and dumps more cars on the roads. Whereas it is true that EVs emit 50% fewer greenhouse gases over their life cycle and half the pollution, the environment and state finances pay a heavy price.
It is worth noting, however, that one section of the population is relatively immune to this trend: well-off, highly-educated individuals, who swap their conventional vehicles with EVs more than other categories. Nevertheless, this positive effect is negligeable.
How can we explain the fact that the automobile market is expanding, which casts doubt on the government policy of subsidising EVs? The authors remind us that according to a number of studies, new tech doesn’t automatically supersede old tech. What it does is create competition between the two, which may last for many years.
In addition, we need to factor in the strategic interests of private companies. Auto manufacturers, for example, are careful to launch new models without killing off existing ranges, and their marketing and launch planning are geared towards this goal.
There is another consideration to be taken into account: new technology doesn’t just bring benefits: grants for EVs partly offset the additional cost, but they don’t solve the problem of their limited range and the lack of charging points. For consumers, switching from a traditional car to an EV is not a foregone conclusion – it’s more complex than that.
In fact, the authors of the Chinese study think that EV sales could be driven by two different buyer profiles. On the one hand, individuals who did not previously own a car but who took advantage of the windfall effect of the EVSS to buy a “clean” vehicle. On the other, households that already owned a conventional vehicle and that were sufficiently well-off enough to invest in an additional – electric – car.
Vehicles are not replaced in either of these two purchase scenarios. And, although there were some individuals who took advantage of the EVSS to give up their old cars, they were far fewer than those who kept them or did not own one.
The study’s results will baffle government policy-deciders. Numerous studies have shown that subsidiaries are a much more effective way to encourage EV uptake than information campaigns or incentives, including free parking for EVs, dedicated lanes when traffic is heavy, and the wide-scale installation of charging points. But how can these grants be maintained if the environmental results are negative?
The authors suggest two potential solutions. First, make the grants conditional on scrapping a polluting vehicle. The Obama administration, for example, chose this route with its Cash for Clunkers scheme, which proved to be a great success. France is going down the same path with its conversion bonus, although it is also keeping its ecological bonus, which does not require buyers to replace their old cars.
The second solution would involve launching a massive information campaign explaining the advantages of green technology. The study shows that well-to-do and highly-educated Chinese households that replace a traditional vehicle with an EV are also sensitive to environmental issues. In addition, they are new technology buffs and are tuned into the low cost of electric compared to fossil fuels.
The researchers advise EV manufacturers to target their marketing on the profiles defined in their purchasing scenarios: individuals who don’t yet have a car together with high-income households that already own a conventional vehicle.
Last but not least, the authors pose a fundamental question: since sales of EVs and combustion vehicles seem to evolve in isolation from each other, would it be right to say that there is still such a thing as a single automotive market? Or has it split into two separate entities?
The Effect of Early Electric Vehicle Subsidies on the Automobile Market. Wu, X. Gong, J., Greenwood, B. N., & Song, Y. (Amy) Journal of Public Policy & Marketing. First published October 2022. https://doi.org/10.1177/07439156221134927