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How Cost-effective are Electric Vehicle Subsidies in Reducing Tailpipe-CO2 Emissions? An Analysis of Major Electric Vehicle Markets

We estimate the cost-effectiveness of plug-in electric vehicle (PEV) subsidies in reducing tailpipe-CO2 emissions in China, the U.S., and nine European countries. We find that the per-tonne cost of tailpipe-CO2 avoided increases linearly with the government-subsidized percentage of the PEV price. Costs are relatively higher in the Netherlands and Denmark, which subsidized high-priced PEVs including plug-in hybrids, and lower in the U.S., where PEVs replaced higher-emissions cars. Chinese PEV subsidies have a short-run static cost of up to $1,600 per tonne, far exceeding the social cost of carbon, suggesting that subsidies are more a part of China's industrial policy than its carbon policy. When subsidy-induced PEV sales and power generation emissions are considered, the ordering of countries based on the cost-effectiveness of subsidies changes. The long-run dynamic subsidy cost is expected to be lower, as current subsidies may drive future innovation and sales, and due to grid decarbonization.

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Keywords: Plug-in electric vehicle, Transportation policy, Subsidy, Greenhouse gas emissions

DOI: 10.5547/01956574.44.2.tshe

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Published in Volume 44, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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