How Cost-effective are Electric Vehicle Subsidies in Reducing Tailpipe-[CO.sub.2] Emissions? An Analysis of Major Electric Vehicle Markets.

• Author: Sheldon, Tamara L.

1. INTRODUCTION

   The transportation sector accounts for 24% of the global greenhouse gas (GHG) emissions (IEA 2019). Within the transport sector, road transport is the most utilized mode because of its convenience (Van Essen 2008). However, it is also the most emissions intensive mode, accounting for 75% of global transport GHG emissions, with roughly 44% coming from road passenger vehicles alone (IEA 2019).

   One way to lower passenger vehicle [CO.sub.2] emissions is through deployment of lower- and zero-tailpipe emission technologies including plug-in electric vehicles (PEVs) (Kalhammer et al. 2007). Demand-side fiscal policies represent one of the most commonly used policy levers for promoting deployment of PEVs (IEA 2019, Langbroek, Franklin, and Susilo 2016, Levay, Drossinos, and Thiel 2017, Lieven 2015, Baldursson, Nils-Henrik, and Lazarczyk 2021). However, early evidence from the U.S., European and Canadian light duty vehicle (LDV) markets suggests that promoting deployment of PEVs through subsidies is expensive (Xing, Leard, and Li 2021, Sheldon and Dua 2018, 2019, Azarafshar and Vermeulen 2020, DeShazo, Sheldon, and Carson 2017, Miess et al. 2022). This paper further explores the evolution of tailpipe-[CO.sub.2] emissions avoided as well as subsidy cost per tonne of tailpipe-[CO.sub.2] avoided across a range of major PEV markets from 2010 to 2017. In particular, we focus on China, the U.S. and nine major European countries, which are currently the leaders in the PEV market, to determine the spatio-temporal evolution of the subsidy impact and cost-effectiveness.

   Given the lack of literature on comparisons between PEV markets in different countries, we identified the following research questions for detailed investigation:

   * How much tailpipe-[CO.sub.2] emission has been avoided through PEV adoption in these different countries, both in absolute terms (million tonnes) and relative terms (percentage)?

   * What is the subsidy cost per tonne of tailpipe-[CO.sub.2] avoided and how does it vary across the different countries?

   * How do the cost numbers change when the extent of PEV sales induced by the subsidy are taken into account?

   * How do the cost numbers change when the emissions from electricity generation used for powering PEVs are taken into account?

   * How can we improve the cost-effectiveness of the subsidy policy, especially for the subsidies that are a part of the COVID-19 stimulus packages?

   * What are the policy lessons that different countries can learn from one another?

   Existing literature focuses on a few individual markets while considering only a few years of data, including our own previous work on U.S. and Chinese markets (Sheldon and Dua 2020, 2019). In particular, in our previous work we were only able to analyze one year of data, 2015 for the U.S. (Sheldon and Dua 2019) and 2017 for China (Sheldon and Dua 2020). Thus, the range of PEV market share penetration that our previous work explored was rather limited, ranging from 0.81% in U.S. to 2.47% in China. Furthermore, the temporal evolution of markets was not explored. This paper draws insights from our and other prior work (1) and contributes to the existing PEV subsidy literature by making cross-country comparisons using detailed annual micro-level data from 11 countries, and looking at the temporal evolution over 8 years from 2010-2017. It compares countries with very different PEV market shares ranging from 1 to 40 percent and subsidy percentages (percentage of PEV price subsidized by the government) ranging from 0 to 55 percent. Through these comparisons, it provides a broader view of how trends and various metrics such as--the extent of [CO.sub.2] avoided and subsidy cost-effectiveness--may evolve with changes in subsidy amounts, PEV prices, and market shares. Overall, this study offers the most comprehensive set of cost-effectiveness estimates for multiple countries in the literature. It also provides insights on some of the factors that contribute to differences in cost-effectiveness figures across countries, as well as lessons that can be drawn from them.

   Finally, in our previous work we estimated the subsidy cost-effectiveness in terms of subsidy dollars per gallon of gasoline saved, which can be translated to subsidy dollars per tonne of tailpipe-[CO.sub.2] avoided. Here, unlike our previous work, we also take into account the emissions from the combustion of fuels associated with the generation and distribution of electricity used to power these vehicles.

   The rest of this paper is organized as follows: Section 2 provides a brief background on the [CO.sub.2] emissions associated with the LDV sector. Section 3 showcases the rich dataset utilized in this study and provides summary statistics for the various vehicle attributes broken down by country and year. Section 4 presents details on the methodology applied in this study together with highlighting all the previous literature where the approach has been utilized. It also lays out the mathematical formulation for the impact and cost-effectiveness calculations. Section 5 provides a detailed discussion on the results obtained from the analysis. Section 6 highlights the policy implications of our findings. Section 7 specifies the caveats of this work. Section 8 highlights the conclusions drawn from the findings of this paper.

2. BACKGROUND

   Internal combustion engine vehicles emit both smog-forming pollutants and greenhouse gases (GHGs) from their tailpipes. [CO.sub.2] makes up roughly 99% of total tailpipe-GHG emissions (U.S. EPA 2019). Battery electric vehicles, on the other hand, do not produce any tailpipe emissions. Emissions are produced though from the combustion of fuels associated with the generation and distribution of electricity used to power these vehicles. Beyond the emissions related to fuel combustion, there are emissions related to extraction, refinery, transport of fuel and vehicle manufacturing. These emissions have not been included in this analysis because of lack of such data for all the countries and for the time period considered in this analysis. Accounting for these emissions is likely to lower the subsidy cost effectiveness. Moreover, the additional benefits of supporting PEVs, such as non-linearities in development of the technologies have not been accounted for in this analysis, thereby highlighting that the cost assessment in this study represents short-run static costs. In other words, short-run static costs only account for the impact of current subsidies on current PEV sales. They do not take into account the current subsidies' impact on future PEV sales. Increased current PEV sales as a result of current subsidies encourages future PEV sales as well. They achieve this by influencing both future PEV prices and consumer perception. Higher current sales from PEV subsidies can contribute to lower future PEV prices through learning-by-doing, economies of scale, and/or induced innovation effects (Gillingham and Stock 2018). Furthermore, increased current PEV sales can positively influence future consumer perceptions of PEVs in terms of popularity, quality, and reliability, potentially encouraging future PEV adoption. Increased current PEV sales can influence future PEV adoption via the neighborhood effect (Chakraborty et al. 2021). To summarize, failing to account for the long-run effects of current subsidies in promoting future PEV sales renders short-run static cost assessments inherently limiting. Finally, here we focus on reduction in GHG emissions only and do not consider the reduction in local pollution from particulate matter in urban settings through increased PEV adoption.

3. DATA

   Our main dataset is a rich panel of passenger car sales and characteristics for the U.S., European and Chinese car market, obtained from JATO Dynamic Limited. The dataset includes the sales, prices, and product characteristics for every new passenger car sold during 2010-2017 in the U.S., China and nine European countries including Norway, the Netherlands, Sweden, Italy, Spain, Great Britain, Denmark, France, and Germany. The datasets for U.S. and China also include regional information.

   Each car is defined at the make-model-powertrain-body type level, e.g., Honda Accord hybrid sedan. Sales are defined as new car registrations. Prices are manufacturer suggested retail prices (MSRPs), excluding any taxes. (2) Car characteristics include measures of vehicle size (wheel base, width, length, height and kerb weight), horsepower and tailpipe-[CO.sub.2] emissions.

   3.1. Summary statistics

   Figures 1,2 and 3 provide summary statistics for various vehicle attributes broken down by country and year. In particular, figure 1 includes new vehicle sales-weighed fleet dimensions including: (a) length, (b) width, (c) height and (d) wheelbase. Figure 2 shows new vehicle sales-weighed fleet average for the attributes including: (a) tailpipe-[CO.sub.2] (g/km), (b) MSRP, (c) kerb weight and (d) horsepower. Figure 3 shows the evolution of the (a) PEV, (b) battery electric vehicle (BEV) and (c) plug-in hybrid electric vehicle (PHEV) market shares in each country over time together with the average PEV subsidy amounts.

   Among the different countries, the U.S. new vehicle fleet is the largest, tallest, heaviest, strongest (in terms of horsepower) and dirtiest (in terms of tailpipe-[CO.sub.2] emissions). On the other hand, the fleets in Denmark and the Netherlands tend to be the smallest, shortest, lightest, weakest (in terms of horsepower) and cleanest (in terms of tailpipe-[CO.sub.2] emissions) for most years.

   For most years, the fleets in Norway, Sweden and Germany tend to be the priciest (excluding taxes). The U.S. fleet became more expensive over time (excluding taxes) and overtook its European counterparts in 2015 and 2016. While all the fleets are becoming greener over time (in terms of PEV market share), the Norway fleet is the greenest followed by the Netherlands and Sweden...