Federal and state policies that regulate vehicle fuel economy and GHG emissions can overlap and interfere with one another. But carefully constructed state policies can complement federal policies and reduce GHG emissions, air pollution, and congestion.
- The US federal government supports plug-in electric and fuel cell vehicles directly via tax credits and innovation subsidies, and indirectly through provisions under standards that regulate vehicle GHG emissions.
- These provisions grant substantial indirect subsidies to alternative fuel vehicles, complicating state efforts to promote the sale of such vehicles and increasing emissions in the short run.
- However, carefully designed state policies can complement the federal policies and help achieve a cleaner fleet and more efficient transportation system.
Currently, the US federal government sets fuel economy and greenhouse gas standards for passenger vehicles and promotes innovation for alternative fuel vehicles. Many states are considering their own transportation policies that would reduce the environmental, health, and time costs of driving. In principle, federal and state policies may interact in important ways, either positively or negatively. We find that state policies targeting only emissions of new vehicles and particularly alternative fuel vehicles are unlikely to decrease national greenhouse gas emissions in the short run, primarily due to interactions with federal regulations. We then examine the conditions under which state and federal policies can have positive long-run social benefits. Carefully constructed state policies can complement the federal policies and achieve states’ objectives.
Figure 1. Optimal Innovation Subsidies due to Learning Spillover, under Alternative Assumptions
Base case assumptions: Sales of EVs are assumed to grow at an annual rate of 22 percent through model year 2025 (sales in the 2025 model year are 850,000); vehicle cost = $35,000; discount rate = 3 percent; spillover elasticity = 0.003.
Notes: Base sales are actual EV sales in 2015 of 116,099. The Sales to 2035 scenario is assumed to follow an S-shaped growth curve, with about 1.8 million in new EV sales by 2035.