Estimating an Optimal Subsidy for Plug-in Electric Vehicles in the United States by County (2013)

Undergraduates: Gregory Grissom, Andrew Yates, Erin Mansur

Faculty Advisor: Andy Yates
Department: Economics

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This study examines the economic efficiency of the market for plug-in electric vehicles (PEVs) in the contiguous United States. To that end, a methodology is developed for estimating the optimal subsidy for the purchase of a PEV as it varies by location, segmenting the region of interest at the county level. The estimation model calculates the net social benefit of substituting a PEV in place of a conventional vehicle over the functional lifetime of an automobile. The model accounts for spatial heterogeneity in marginal damages from tailpipe emissions as well as variation in average marginal emissions from electricity generation based on regional identity within the national electric grid. The findings show that the mean and median optimal subsidy values for U.S. counties lie in the range of $600 to $700, with some urban counties achieving values up to over $6,000 and no counties having subsidy values below $300. A comparison of the estimated optimal subsidy with the regulatory status quo for federal PEV subsidies indicates that the current policy of granting purchasers of new PEVs a federal income tax credit of $7,500 is in excess of the amount of compensation which would satisfy the efficiency condition. Current state-based incentives and alternative methods of internalizing social pollution costs associated with transportation are also evaluated based on the optimal subsidy calculations.