Do Consumer Tax Credits for Electric Vehicles Work? Implications for Product Substitution and Carbon Emission

Governments worldwide have spent billions of dollars on monetary incentives for consumers, such as tax credits, to encourage the adoption of eco-friendly (“green”) products. However, there is little consensus regarding the effectiveness of tax credit incentives in increasing green product adoption and reducing carbon emissions. The literature is also limited on the mechanisms through which monetary incentives work in general. We address these issues by studying the impact of tax credit incentives on green and non-green vehicle sales in the U.S. auto industry. A tax credit incentive could boost green vehicle sales through cost savings on the vehicle’s price. However, the incentive may prove ineffective due to important barriers to adoption (e.g., long charging times for electric cars). To measure the sales and emissions impacts of tax credit incentives, we study incentive changes across 46 counties in South Carolina and Oregon via various quasi-experimental approaches. Unlike recent studies showing an insignificant or a negative correlation between tax credits and electric vehicle (EV) adoption, our analyses show that unit sales of incentivized plug-in-hybrid electric vehicles–PHEVs–increase by an average of 3.7% (up to 52.7% in some counties) following a $2,000 incentive. In contrast, PHEV sales remain unchanged after the incentive’s termination, implying a positive net sales effect. We also explore the underlying mechanisms for the incentive’s impact by examining various purchase funnel stages. In the awareness stage, the incentive’s positive effect on PHEV demand peaks during the consumers’ tax-filing period; in the consideration stage, our analyses of online consumer search indicate that the incentive does not expand the consumer pool considering PHEVs. As for the conversion stage, the incentive generates more sales for PHEVs in counties where 1) consumers are more likely to have PHEVs in their consideration sets regardless of the incentive (i.e., Democratic counties), and 2) consumers value cost-saving more (i.e., counties with lower-middle income). Also, the heightened demand for PHEVs following the incentive stems from the substitution from gasoline vehicles with high fuel efficiency. We estimate the average cost of reducing carbon emissions through tax credits to be $96 per ton, which is less expensive than tax rebates for conventional hybrids and subsidies for residential solar panels.