Clean Vehicle Incentives and Urban Air Quality: Evidence from Italy

Governments increasingly rely on purchase incentives for electric and hybrid vehicles to address both climate change and local air pollution. This paper provides new causal evidence on the environmental effectiveness of sub-national vehicle purchase incentives in Italy. Exploiting rich spatial and temporal variation in regional and municipal policies across Italian provincial capitals between 2013 and 2023, we show that the introduction of purchase incentives leads to statistically and economically significant reductions in traffic-related air pollution, measured by maximum annual concentrations of nitrogen dioxide (NO2). These effects are robust across multiple specifications and placebo tests and are primarily driven by direct cash subsidies, while purely fiscal incentives do not generate detectable improvements in air quality. To uncover the underlying mechanisms, we document that incentives substantially increase the adoption of electric and hybrid vehicles and accelerate the phase-out of diesel cars, having an effect on investment in active mobility infrastructure and on changes in selected forms of electric micro-mobility. A decomposition exercise shows that technological substitution within the vehicle fleet is the main channel through which incentives reduce NO2 concentrations. Overall, the results highlight the importance of incentive design and provide policy-relevant evidence on the role of demand-side policies in improving urban air quality.