The broader goal of promoting alternative fuel vehicles, whether at federal or state levels, is premised on the notion that increasing short-run sales will ultimately reduce the costs of adopting new vehicle technologies for consumers or manufacturers, enabling stricter emissions standards and lower emissions in the long run. State decisionmakers considering policies that promote innovation and new technology adoption should be aware of the trade-off between higher emissions in the short run and the potential for lower costs and emissions in the long run.
State Policy Design Options
Considering the opportunities for emissions reductions and technological innovation from state programs—as well as the potential for emissions leakage—a number of policy options are available for states, including taxing carbon, congestion, or miles traveled; subsidizing alternative fuel vehicle technologies; and subsidizing public transportation. We found that a carbon tax addresses, if imperfectly, the external costs of driving, and a congestion tax is more efficient at reducing congestion than other taxes. We argue that combining carbon and congestion taxes is more efficient than using only one tax or a combination of other tax policy options. Nonetheless, other taxes can increase social welfare by reducing miles traveled or the carbon content of fuels.
Combining carbon & congestion taxes is more efficient than using only one tax or a combination of other taxes.
Direct subsidies for alternative fuel vehicle technologies (such as tax credits for vehicle purchase or charging stations) could be justified if federal subsidies are below socially optimal levels. Implicit subsidies created by vehicle mandates such as California’s ZEV Program could be justified as well. We found some evidence that suggests further state subsidies beyond those provided by the federal government may be justified in the long run—but this remains an open question.
Finally, it is important to note that each of the policies we have discussed implies different costs—as well as differences in who pays the costs. On one hand, for example, the California program raises the prices of non-ZEVs, as manufacturers adjust vehicle prices to encourage consumers to purchase ZEVs. Assuming full compliance, the ZEV Program determines the quantity of alternative vehicles sold, but the per-vehicle costs are uncertain. On the other hand, with subsidies, the per-vehicle fiscal cost is known, but uncertainty exists about the number of additional alternative vehicles sold. Taxpayers incur the costs of subsidies, whereas vehicle manufacturers and consumers incur the costs of sales mandates. Little is known about the distributional effects of other policies, and this is an important area of future research.