Is Pollution Reduced or Redistributed? The Impact of Electric Vehicle Subsidies in China

Abstract

This paper examines the geographically heterogeneous environmental effects of electric vehicle (EV) subsidies in China and compares EV subsidies with alternative policies that price environmental externalities. The study employs a structural model that features demand and supply to analyze the environmental effects of EV subsidies through counterfactual analysis. Our findings suggest that EV subsidies incentivize the substitution of EVs for internal combustion engine vehicles (ICEVs), which reduces local pollution but potentially redistributes it to locations of electricity generation. Specifically, the proposed 71.2% increase in EV subsidies decreases (Formula presented.) emissions by 0.1%, but raises emissions of (Formula presented.), and (Formula presented.) by 0.1%, 3.9%, and 113.1%, respectively, over the period analyzed. More importantly, the increased subsidies redistribute pollution: The additional subsidies reduce (Formula presented.) in electricity-importing regions by 21.1%, but increase (Formula presented.) in electricity-exporting regions by 62.4%, with similar effects for (Formula presented.) and (Formula presented.). These results demonstrate that EV subsidies redistribute pollution rather than reducing it overall. Local governments' EV subsidy decisions could be inefficient if pollution redistribution is ignored. A centralized policy could partially address this. In addition, pricing ICEV externalities could reduce pollutants more efficiently.