Incentivizing capital investments in electric vehicle attributes to stimulate demand

This paper investigates the optimal subsidy path when emerging low-emission technologies, such as electric vehicles (EVs), compete with established high-emission incumbents, such as internal combustion engines (ICEs). I develop a dynamic model that accounts for market competition, the channel of sales leading to technology improvements, and the externality of carbon emissions. This paper compares dynamic purchase and investment subsidies with currently fixed subsidies in the US and no policy baseline. To calibrate and run the model, I utilize collocation methods and use coefficients from the estimation of aggregated real market data: 531 vehicle models sold in the US from 2008 to 2019, as well as SEC filing reports. I find that the optimal policy path is heavily front-loaded, beginning with high subsidy values that phase out as EV firms accumulate capital and reach technological maturity. Both dynamic purchase and investment subsidies significantly increase the total social net benefit compared to constant subsidies. The results suggest that constant subsidies, which are not responsive to changes in market information, fail to account for the dynamic gains from induced investment and technological learning, which are essential for achieving an efficient market transition.