Which Green Technology to Subsidize? Evidence from Electric Vehicles in South Korea

We develop a framework to compare the relative effectiveness of subsidizing alternative emission-reducing technologies. We show that an intermediate technology may reduce emissions more effectively than the cleanest technology if it induces sufficiently greater substitution away from the prevailing high-emission technology. We apply the framework to the South Korean passenger vehicle market using a demand model that incorporates mileage heterogeneity, an important determinant of fuel-type choice. First, reallocating existing subsidies from battery electric vehicles (BEVs), the cleanest technology, to hybrid electric vehicles (HEVs), an intermediate technology, would reduce total greenhouse gas emissions by an additional 47%. Second, for a BEV-focused subsidy policy to outperform an HEV-focused policy, the carbon intensity of electricity generation would need to fall by approximately 45%. Our findings suggest that HEV subsidies remain more effective than BEV subsidies until consumers become sufficiently willing to switch to BEVs or electricity generation becomes sufficiently decarbonized.