How to increase the uptake of EVs: Subsidize price or charging stations?

By Amitrajeet Batabyal
BridgeTower Media Newswires

Climate change is the most serious environmental problem that confronts humans today. Greenhouse gases (GHGs) are collectively most responsible for the climate change problem. Therefore, national governments are thinking about how best to reduce the emissions of GHGs in their respective nations. 

According to the World Resources Institute, globally, the transport sector is responsible for 24 percent of all GHG emissions. The Environmental Protection Agency tells us that the corresponding number for the transport sector is 29 percent in the United States. Given these high numbers, governments in many countries are now looking to see how GHGs can be reduced by encouraging the uptake of electric vehicles (EVs). 

Beyond agreeing that encouraging more people to drive EVs would be a good way of fighting climate change, there is little agreement on exactly how to encourage people. Should we make EVs cheaper to buy by subsidizing the price? Should we give EV drivers tax breaks? What about the “range anxiety” that keeps many potential EV drivers away? Instead of granting price subsidies, does it make more sense to subsidize the installation of charging stations? 

These are salient questions but they cannot, generally speaking, be resolved theoretically. One needs to address them empirically. However, high-quality empirical research on these questions has been lacking. That said, in thought-provoking new research, the economist Katalin Springel has shed valuable light on some of the above questions. 

The main question addressed by Springel is this: If a government has a fixed pot of money to encourage the uptake of EVs, should it subsidize consumers by directly reducing the cost of purchasing EVs? Or should it attempt to address “range anxiety” by subsidizing the installation of charging stations? She looks at EV data from Norway between 2010 and 2015 to answer the preceding question.

Readers may be wondering what we can learn from tiny and homogeneous Norway. There are two good reasons for believing that we have much to learn from Norway. First, at 20 percent, Norway has the highest market share of EVs among all new car sales. This means that Springel’s results apply to the typical consumer and not only to early adopters of EVs. Second, most of the electric power used in Norway is hydroelectric power and hence this avoids having to worry about whether, for instance, coal is used to generate the electricity that ultimately powers EVs.

The analysis conducted by Springel leads to four noteworthy results. First, a $1,239 per EV subsidy leads to a 2.5 percent increase in EV sales. In comparison, a $1,239 per station increase in the subsidy to a charging station results in a 14.6 percent increase in EV sales. Before proceeding further, note that there are positive feedback effects in EV markets. This means that as the number of EVs in a market increases, it makes more economic sense to install more charging stations and, concurrently, the number of charging stations influences the decision to purchase more EVs. 

Second, for every $12.39 million spent on charging station subsidies, there are 1,239 additional purchases of EVs. However, the same amount of money, when spent giving consumers price subsidies, leads to only 502 more EV purchases. Simply put, charging station subsidies are more than twice as effective in increasing EV sales. 

Third, subsidizing charging stations is not always superior to granting price subsidies. This superiority depends on the size of the government’s subsidy budget. For small amounts of government spending, subsidizing charging stations beats subsidizing EV prices. However, as the government’s subsidy budget rises, it is better to subsidize prices and not charging stations. This is because the effect of a charging station subsidy attenuates much faster than the effect of a price subsidy.

Finally, for a given subsidy budget, the government’s best course of action is to subsidize both EV prices and charging stations. This provides the government a bigger bang for its buck relative to subsidizing either prices or charging stations. 

President Biden has said that he wants EVs to comprise 50 percent of all new car sales by 2030. He has also said that in order to attain this goal, he wants to build 500,000 new charging stations. Springel’s research shows that focusing only or even primarily on charging stations will not get the job done. Of course, building many new charging stations will significantly allay “range anxiety.” That said, the president also needs to dangle the carrot of lower EV prices to get more Americans to switch to EVs. 

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Amitrajeet Batabyal is the Arthur J. Gosnell professor of economics at the Rochester Institute of Technology but these views are his own.