Clean Cars, Dirty Margins: Portfolio Responses to Electric Vehicle Subsidies

ABSTRACT

Economists view Pigouvian pricing as central to efficient climate policy, yet transportation policy relies heavily on subsidies that misalign incentives across behavioral margins. We study the emissions consequences of Sweden’s 2020 increase in plug-in hybrid vehicle (PHEV) subsidies. Using rich nation-wide administrative data and a fuzzy regression discontinuity design based on predetermined lease-renewal timing, we estimate how exogenous subsidy exposure affects entire household vehicle portfolios and, importantly, driving behavior. Treated households choose lease-renewal vehicles that are 7.3 percent less fuel-intense, but retain vehicles that are 3.9 percent more fuel-intense, consistent with attribute substitution across cars. Driving responses offset as well: replacement vehicles are driven less, retained vehicles more. Consequently, the policy yielded a small and statistically insignificant decrease in total gasoline consumption. These portfolio effects are concentrated almost entirely among multi-vehicle households, who increase retained-car driving by 1,228 kilometers per year and retain dirtier vehicles — effects that are statistically indistinguishable from zero for single-vehicle households. Households with three or more cars expand their portfolio size. Implied carbon abatement costs of the policy average $1,061 per ton of CO2 on a 100 percent clean electric grid, and we reject costs below $200 per ton at conventional levels. Accounting for within-household substitution substantially revises downward the direct environmental benefits of EV subsidies relative to standard assumptions.

BIO

Teevrat Garg (he/him) is an Associate Professor of Economics in the School of Global Policy and Strategy at the University of California, San Diego. His research focusses on environmental policy and energy transitions in low- and middle-income countries. His current portfolio of research involves working directly with regional governments and utilities in understanding climate adaptation and decarbonization. In recent years, he has conducted research in India, Bangladesh, Indonesia, Mexico, Uganda and Vietnam. Teevrat’s work has been published in leading academic journals and covered by prominent media outlets such as the New York Times and Science Magazine. His policy engagements include serving as an Academic Advisor to the Green Growth Initiative at the International Growth Center and serving as a Technical Contributor to the 5th National Climate Assessment. He currently serves as the editor of the Journal of the Association of Environmental and Resource Economists (JAERE).

Prior to joining University of California - San Diego, Professor Garg was a postdoctoral fellow at the London School of Economics and Political Science. He received a B.A. in Economics and a B.S. in Mathematics from Lafayette College in 2010, and a PhD. in Applied Economics and Management from Cornell University in 2015.