Subsidy-Induced Innovation & Learning: How Green are Subsidies in Electric Vehicles?

Abstract

Subsidizing technology fosters product innovation and cost reductions that lead to quicker technology adoption. This effect could justify government expenditure beyond the social value of the subsidized good over its lifetime. This paper proposes a method to calculate the underlying ecological value of innovation, learning, and economies of scale within a subsidy. The proposed calculation method uses price elasticities and learning rates in a Bass-inspired adoption curve model to correct for effects that depend on the number of products sold, e.g., market saturation and learning. Correcting for these effects allows me to compare scenarios with and without subsidy and draw conclusions about the long-run ecological effects. I showcase this method on the governmental subsidy programs for electric vehicles in the United States, China, and Germany. The evaluation shows that the underlying ecological value of secondary carbon abatements resulting from subsidy-induced innovation, learning and economies of scale is of significant importance and might even outweigh the value of the directly associated carbon savings of the subsidized vehicles.

Keywords: Subsidy Efficiency, Innovation, Learning, Electric Vehicles

JEL Classification: O18, O3, Q55, Q58, R48