Roadblock or Accelerator? The Effect of Electric Vehicle Subsidy Elimination

This working paper addresses the dynamic effects of electric vehicle subsidy-capping designs in the US market.



May 5, 2023


Nafisa Lohawala


Working Paper

Reading time

1 minute


Federal and state governments in many countries subsidize the early adopters of electric vehicles (EVs). These programs often use quotas or deadlines to phase out the subsidies, which can create dynamic incentives for car manufacturers. Since most of the literature studies the effect of introducing subsidies on market outcomes in static settings, little research has addressed the dynamic effects of subsidy-capping designs. This paper explores those effects in the US vehicle market. I develop a structural model of consumers’ vehicle choices and manufacturers’ pricing decisions in the US automobile industry. I then estimate the model using comprehensive data on new vehicle registrations, prices, characteristics, and subsidies in 30 states between 2011 and 2017. Based on the primitives generated from the model, I conduct counterfactual simulations to compare three designs: a marketwide deadline, a per-manufacturer deadline, and a per-manufacturer quota. The simulations show that for a given government expenditure, the quota leads to up to 18 percent lower EV sales than the deadlines. Moreover, each design influences the sales of conventional vehicles, consumer surplus, manufacturer profits, and liquid fuel consumption differently.


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