Design and selection of government policies for electric vehicles adoption: A global perspective

Highlights

• Study the effect of of subsidy and differential taxation schemes on the market penetration of EVs.

• The government maximizes social welfare by deciding optimal incentive schemes.

• Levying tax on gasoline vehicles (GV) without subsidy to the manufacturer minimizes the overall environmental impact.

• In contrast, levying the same tax for both types of vehicles without subsidy generates the maximum environmental impact.

Abstract

Regardless of increased attention in electric vehicles (EV) market expansion, the actual penetration of EVs remains low globally. Almost all major OEMs have announced investment plans to ensure that EVs constitute a major, if not complete, chunk of their product portfolios. On their part, governments worldwide (e.g., China, Poland, India, USA, etc.) have used various policy measures to facilitate EV adoption. In this paper, we study how incentives offered in terms of subsidy and differential taxation schemes could increase the market penetration of EVs. We analyze different models under uniform and differential taxation policies with and without subsidy, using a non-cooperative game-theoretic approach. Our analysis reveals that the government can follow any of the three tax-subsidy mixes that could maximize social welfare, i.e., differential taxation with and without subsidy, and identical tax with a subsidy. Surprisingly, the manufacturer's profit, the government's income, and consumer surplus for these three models are also the same and are better than the other two models depending on the consumer's green sensitivity, i.e., for higher green sensitivity, these three models can provide a win–win outcome. From an environmental perspective, levying tax on gasoline vehicles (GV) without subsidy to the manufacturer minimizes the overall environmental impact. In contrast, levying the same tax for both types of vehicles without subsidy to the manufacturer generates the maximum overall environmental impact. Furthermore, an increase in the unit environmental impact of vehicles attracts higher taxes. We portray that the increase in the cost-difference between EV and GV increases GV demand and is detrimental for EV acceptance. In addition, multifaceted insights are drawn for manufacturers and policymakers to envisage electric mobility. We extend our models and show that our main results hold under the implementation of mandate on EV manufacturers under subsidy and non-subsidy model, and inclusion of hassle cost for consumers due to lack of infrastructure in terms of charging facilities and maintenance.

Introduction

Increasing greenhouse gas (GHG) emission is a key global concern among policymakers, academicians, and environmentalists, as emissions continue to grow at a rate of 1.6% in 2017 and are projected to grow further (Washington Post, 2018). Specifically, the transportation sector alone accounts for about 23% of global GHG-related emissions, and the same is projected to surge up to 50% by 2050 (Bunsen et al., 2018). For instance, in countries like the USA, its share is even higher – accounting for 28.9% of GHG emissions in 2017 (Bunsen et al. 2018). The internal combustion engine-based gasoline vehicles (GVs) majorly dominate the current transportation system. However, of late, electric vehicles (EVs) have emerged as a more efficient alternative, with zero tailpipe emissions, and even better well-to-wheel efficiencies, i.e., total energy consumption in their lifecycle (Shao et al., 2017, Zhang and Huang, 2021). Consequently, stakeholders have been trying to get a nuanced and multifaceted understanding of issues related to electric mobility.

Over the years, EVs have been gaining traction among environmentally aware consumers; thus, they have witnessed a surge in sales (Smith et al., 2017). In 2020, the global fleet of EVs hit the 10 million sales targets, an increase of 43% from the 2019 level (IEA, 2021). Regardless of this growth, the global penetration of EVs remains low as compared to conventional vehicles. The same can be established by the fact that China, despite having the highest EV sales in 2020, only had 5.7 % of the EV market share (IEA, 2021). Having said this, one needs to bear in mind the challenges for EV adoption. These could range from lack of charging infrastructure, range anxiety (apprehension about the short driving range of EVs), resale anxiety (worry related to the future value of EVs), absence of adequate incentive policies leading to huge upfront purchasing costs of EVs, lack of stringent emission regulations, bounded rationality (not being able to compute the future cost saving through the purchase of EV due to lack of information), among others (Lim et al., 2015, Masmoudi et al., 2018, Hiermann et al., 2019). Herein, it is also important to note that consumers buy EVs for multiple reasons, including performance, technology, environmental benefits, symbolic motivations, lower operational costs, etc.; however, many of them primarily focus on the financial benefits only (Hardman, 2019).

In order to remove such barriers, governments worldwide have been using various policy levers in the form of taxation and incentives (Axsen and Wolinetz, 2018, Chemama et al., 2019). Financial incentives, if appropriately designed, could possibly balance out the cost differential between EV and GV, which in turn could become the most important driver for customers to buy an EV (Lévay et al., 2017). Additionally, to deal with the high upfront cost of EVs relative to GVs, governments worldwide have used different policy interventions like subsidizing both EV consumers and manufacturers while taxing GV customers heavily (Lévay et al., 2017, Chakraborty et al., 2021). Specifically, the UK government, for instance, proposed a £1.3 billion plan for boosting the demand for EVs across the UK, which includes providing consumer subsidy for EV purchases, and setting up sufficient charging stations across the nation (Financial Times, 2020). Furthermore, Chinese firms like BYD and BAIC Motors have received subsidies from the Chinese government to boost the production of plug-in vehicles (Reuters, 2017). Moreover, the Indian government has also decided to slash the Goods and Service Tax on EV purchases from 12% to 5% and also provide additional tax benefits for EV purchases, thereby reducing the price differential between an EV and a GV (Economic Times, 2019). In countries like Norway, policies such as exemption of EVs from Value Added Tax, registration tax, and annual circulation tax are in place (EEA, 2019). However, despite some countries either providing subsidies for EVs or taxing the purchase of GVs, other countries like Poland don't have any specific policy for stimulating EV demand in terms of levying taxes or providing subsidies (EEA 2019).

These five models are considered based on the prevailing tax-subsidy mix available in the different countries. For example, when the government does not provide any incentives for EV consumers as well as EV manufacturers, indicating no policy support from the government to boost EV adoption. Countries like Poland are following such a model. Here, the government is indifferent between an EV and GV consumers as well as manufacturers and thus considered as a model for the study. Another case is when the government, which is indifferent between an EV and GV consumers, levies the same taxes on both consumers but provides an incentive to EV manufacturers to boost the EV supply. Such models are in use in a few provinces of China. The business model behind such a case is to boost the supply side of the EV and thus be able to create a better EV supply chain.

On the other hand, the Indian government levied 28% goods and service tax (GST) for GV consumers, whereas GST is only 5% for EV consumers. Such tax incentives help to reduce the differential price in the upfront cost between an EV and a GV and directly help the EV consumers. Hence, it is essential to study the impact of this model in comparison to other models used in different countries.

Further, there are countries like Norway, where the government imposes multiple taxes on GV consumers, whereas EV consumers are tax exempted. Here again, the focus is on EV consumers rather than the EV manufacturers to deter prospective consumers from buying a GV with the imposition of multiple taxes. Such models have effectively supported EV adoption in many countries like Norway, Sweden and hence its comparison with other models may provide us important insights. Lastly, there are a few cases where the government supports both EV consumers as well as EV manufacturers. More specifically, the government imposes taxes on GV, whereas EVs are tax-exempted. Additionally, it also provides incentives to EV manufacturers to support the EV supply in the market. Such scenarios are the combination of policies used in China and Norway. In this case, the government invention is maximum in terms of supporting both EV consumers and the manufacturers. Consequently, this model may negatively impact the government revenue compared to other models and is thus included in our study.

Furthermore, we also gathered the latest developments in various countries related to EV subsidies and tax incentives. For example, as a recent development in the US, where the current administration will drive EV demand with “point-of-sale incentives” to support EV deployment (Washington Post, 2021). The purpose of these incentives is to lower the EV price and to make it more affordable for EV consumers. A recent article in Forbes highlighted the role of government policies in the successful adoption of EVs in Norway (Forbes, 2019). One of the major reasons stressed for the higher adoption of EVs is the government policy and incentives for EV purchasers. Norway exempted multiple taxes on EVs to reduce its price with its GV counterparts. In contrast, they raised taxes on conventional cars in terms of pollution tax, which further helps the EV adoption. As these incentives create a burden on the government’s revenue, countries like China have reduced the direct subsidy to EV consumers and facilitated incentives to EV manufacturers (MIT News 2021 and IEA, 2021).

Summarising these latest developments, the five models in our study adequately capture the various scenarios available in different countries to support both demand and supply sides related to EVs. It is to be noted that these models can also be looked at from the lenses of both consumers’ perspectives as well as the manufacturer’s perspectives. From the consumer perspective, we have included those cases where consumers are receiving any additional tax benefits while purchasing an EV over a GV. The models DTNS, and TGNS, aim to provide incentives to EV consumers only and are thus included under the ambit of models addressing consumer perspectives. Further, from the manufacturer’s perspective, the subsidy is provided to automobile manufacturers for producing EVs to improve the supply side. Hence, we consider two possible cases, i.e., STS and STNS, where the government provides subsidy or no subsidy to the automobile manufacturer for producing EVs respectively.

There is a considerable amount of research on EVs, including the positive impacts of EVs usage (Shao et al., 2017, Zhang and Huang, 2021), key challenges for EVs adoption (Masmoudi et al., 2018, Hiermann et al., 2019), financial incentives for the faster EVs adoption (Lévay et al., 2017, Chemama et al., 2019). However, few prior studies have analytically examined the impact of mixed policy interventions (e.g., taxation-subsidy mix) for boosting the EVs adoption. Due to varied policies, mixed policy interventions may have a different impact on the consumers, manufacturers, and finally on the government. Hence, it is necessary to evaluate which model is better off in different scenarios from the government and the manufacturer’s perspectives. We compare the outcomes of these type of models and generate additional insights for manufacturers and governments to create a conducive EV ecosystem.

From the discussion above and the models listed in Table 1 earlier, it is evident that different countries have been using various policy measures like consumer or manufacturer subsidy/taxes to boost EV sales. However, the question of what could be the basis of deciding such a taxation-subsidy mix remains. This, in turn, motivates us to delve deeper into various forms of non-recurring financial policy instruments and make pragmatic decisions. Herein, it may be noted that our focus primarily revolves around 'non-recurring financial incentives'; in other words, subsidies or one-time taxes for speeding up EV adoption. Hence, we do not consider any recurring financial incentives such as highway lane access, access to infrastructure, free parking, etc. (Münzel et al., 2019).

Motivated from real-world policy interventions and regulation, we characterize the optimal price, demand, manufacturer's profit, and consumer surplus under a monopoly market structure. We study social welfare, which consists of manufacturer's profit, total green tax, the subsidy provided, overall environmental impact, and consumer surplus. By comparing the findings of the five models listed in Table 1, we try to answer the following research questions:

• What is the optimal green tax and subsidy mix for maximizing social welfare?

• How do different tax and subsidy modes influence the demand for GVs and EVs, social welfare, consumer surplus, vehicle price, and government expenditure?

• How does the unit environmental impact of EVs and GVs affect the government's policies in choosing the subsidy and green tax mix?

• How does the green sensitivity of customers influence the demand of the vehicles, overall environmental impact, the green tax and subsidy mix, and social welfare?

To answer the above research questions, we consider a single manufacturer in the automobile sector who sells both EVs and GVs. The government decides the subsidy and green tax to maximize social welfare. At the same time, the manufacturer chooses the optimal price of EVs and GVs to maximize its profits. We start with a generalized model and then study five different combinations of green tax and subsidy mix, policy decisions based on the prevailing scenarios, and the various policy instruments employed by different countries. The basic model framework of our study is shown in Fig. 1.

Previously, researchers have studied the effectiveness of financial incentives (e.g., subsidies) as a strategy to improve adoption (Jenn et al., 2018, Deuten et al., 2020). Some studies explore the impact of indirect incentives such as exemption from registration and annual taxes (Lévay et al., 2017) and sales tax exemption (Gerlagh et al., 2018). Interestingly, the literature shows that incentives offered can have a mixed impact (positive as well as negative) on EV adoption. For instance, offering rebates and tax credits can positively affect EV sales (Jenn et al. 2018). However, in another study, Deuten et al. (2020) find that instead of incentives, strong penalty norms (for manufacturers not adhering to emission regulations) can be a better instrument for promoting EVs in some scenarios. As per our knowledge, none of the earlier studies had jointly analyzed the role of emission taxation and subsidies policy based on adoption. Considering that a joint policy instrument can be an optimal strategy to facilitate EV adoption is imperative.

A few recent studies dealt with consumer or manufacturer subsidies from different perspectives (Bian and Zhao, 2020, Bian et al., 2020). However, their limitations include manufacturer competition, market response in line with emissions, consumer environmental concern, consumer heterogeneity, and different market segmentation, which we try to examine in our current paper. This paper differs significantly from previous studies and contributes to the literature in multiple ways. We show that multiple combinations of green tax and subsidy mix can be equally viable as alternatives for maximizing social welfare and minimizing the overall environmental impact. Additionally, we further explore the impact of the implementation of mandate on EV manufacturers under subsidy and non-subsidy model and inclusion of hassle cost on consumers for EVs adoption.

Our analysis reveals that the government can follow any of the STS, DTNS, or TGS models to maximize social welfare. The remaining two models, i.e., STNS and TGNS, produce lower social welfare. We also note that higher taxes on either of the vehicle types reduces the demand for that vehicle, while subsidies help in increasing the demand (as in the case of EVs). Further, manufacturer profit, government income, and consumer surplus for the Model DTNS, STS, and TGS are equal and better off compared to the other two models depending on the consumer's low carbon awareness (green-sensitivity). Model TGNS generates minimum environmental impact from an environmental perspective, whereas the Model STNS produces the highest environmental impact. Moreover, an increase in the environmental impact of EVs and GVs is liable for higher green taxes for both types of vehicles. Additionally, increases in GV’s environmental impact facilitate higher subsidies for manufacturers to produce EVs. From the cost perspective, an increase in relative cost-coefficient enhances the demand for GVs and lowers the demand for EVs.

The rest of the paper is organized as follows. Section 2 presents the review of the literature. Section 3 illustrates the model description. The analysis of a generalized model is carried out in Section 4, and illustrative models are presented in Section 5. Section 6 presents the discussion, and Section 7 concludes the study with research directions. All proofs are relegated to the 'Online Appendix'.