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Electric Vehicle Subsidies

Electric vehicles are an emerging technology with strong positive (socially beneficial) externalities, such as reducing air pollution and associated premature deaths from the exhaust from conventional vehicles. Additionally, electric vehicles must compete against conventional vehicles, an entrenched, mature technology, benefitting from many years of cost declines from learning and returns-to-scale. Conventional vehicles also benefit from an implicit subsidy: owners of conventional vehicles do not have to pay for the human health or environmental harms caused by the emissions from their vehicles.

As such, there is an appropriate role for government to subsidize the purchase of electric vehicles, to help them gain scale in the marketplace and achieve cost declines, as well as to reward their socially beneficial externalities. Many countries and states currently offer subsidies to EV buyers.

EV subsidies are typically seen as a temporary measure. Once EV technology brings down prices sufficiently, EV subsidies may be gradually withdrawn, particularly if this withdrawal is accompanied by fees on conventional vehicles to monetize the harmful externalities associated with their emissions. (If conventional vehicle owners never have to pay for these externalities, there is an argument that EV subsidies should never be withdrawn, to maintain an even playing field.)

Any reduction or withdrawl of subsidies should be done gradually, according to a schedule announced years in advance, to allow vehicle makers and consumers time to adjust.

For a more detailed discussion, see the applicable chapter of Designing Climate Solutions, our book on smart energy and climate policy design.