Demand-Side vs. Supply-Side EV Policies

The transition to electric vehicles is inevitable, but the turnover process will be slow. Today, around 5 million plug-in electric vehicles operate on the world’s roads, constituting only 0.4% of the global volume of 1.3 billion cars. The market is still curbed by barriers such as a lack of supply, restricted variety of models, and limitations in charging infrastructure. To reach the International Energy Association’s projection of 140 million electric vehicles by 2040 (about 7 percent of all passenger vehicles), international governments and agencies need to ramp up their policy-making.

The market is still curbed by barriers such as a lack of supply, restricted variety of models, and limitations in charging infrastructure

The Role of Policy in the Auto Industry

Technological improvements in automotives have always been directly associated with the policy. Whether it be seat belts to address safety regulations or fuel economy improvements to meet environmental mandates--technology is driven by strong policy.

Now, when looking at the rise of electric vehicles, policy plays just as important of a role in driving innovation and incentivizing consumer support. Many countries, including those who ratified the Paris Agreement, have spearheaded this movement by committing to pushing the electric car agenda forward.

However, national EV policies differ across countries in magnitude and orientation, ranging from a focus on supply-side innovation policy to demand-side environmental policy. This article will examine two cases which represent the polar ends of this policy spectrum: Norway and California.

While Norway’s electrification strategy is largely demand-focused, using large incentives and tax breaks to make EVs more appealing to consumers; California’s is supply-focused, mandating automakers to allocate innovation and marketing strategy into EV development.

Demand-Side Policies

Low consumer demand discourages car manufacturers from increasing the supply of EVs, and one of the largest barriers to sales is the high price of EVs relative to conventional vehicles. Government policy can address this issue by significantly reducing purchase price through financial incentives like tax exemptions or purchase rebates.

The best example of this? Norway.

Last year, about one in every three new vehicles sold in Norway was an EV, and the nation’s EV sales grew by another 40% this year. The explanation for this success lies within the huge incentives offered by the Norwegian government. Norway imposes a high stamp duty on internal combustion vehicles, so exempting battery EVs from both stamp duty and the high 25% Value Added Tax offsets the price differences between combustion and electric vehicles, thus increasing the appeal of EVs to Norwegian consumers. Even more, EV owners are provided with an exemption from road tolls, free recharge sites, free parking, free car ferry travel, and access to bus lanes.

Norway’s example provides solid evidence that demand-side policies can spur EV sales. With the right incentives, consumers can shape markets with their purchasing power. However, in order to have a lasting impact, such incentives must be large in value and long in duration (typically 10+ years).

Given how costly this would be for governments, a demand-side plan modeled off Norway’s successful policies is likely only applicable to highly-developed, technologically-advanced nations with significant available funds. This description fits a minority of the world’s nations, such as the Nordic States. In fact, the IEA 2018 EV Outlook that by 2030, up to 4 million electric vehicles will be on the road in the Nordic states, accounting for 80% of EV growth.

Supply-Side Policies

On the supply-side, EV production is just as limited as consumer demand. An EV turnover threatens conventional auto companies and makes decades-worth of patents, operations, technology, and intellectual property obsolete. This explains why auto companies still funnel advertising cash from their EV products to continue promoting conventional cars.

Therefore, government policies subsidizing the development of EV technology as well as mandating environmental compliance from automakers are equally as influential demand-side policies.

Much of the ongoing R&D of plug-in hybrid and battery electric vehicle technology here in the US can be linked to California’s Zero Emission Mandate (ZEV) mandate. The policy, introduced in 1990, requires automakers to develop and sell EVs or hydrogen fuel-cell vehicles in California. ZEV policies, including R&D subsidies, patents on EV technology, and investment in charging infrastructure, have driven innovation and significantly increased EV availability for sale.

The ZEV mandate has also provided an environment for new auto players like Tesla to flourish and incentivize competition in the EV market. ZEV requires car manufacturers that do not sell enough EVs relative to their other vehicles to either buy credits from those that over-comply, such as Tesla, or pay a hefty penalty. Therefore, Tesla’s profits in a given quarter are largely composed of the credits it earns and sells through the ZEV mandate.

Supply-side policies can be considered more effective than their counterparts in that they are usually more clear and direct, providing sales target to automakers with firm penalties for non-compliance. The ZEV mandate also places the responsibility on automakers to leverage their resources to build the EV market and develop the products that consumers want.

Lastly, in the long run, supply-side policies send a firm message to stakeholders that the transition to electric mobility is underway, which heightens consumer confidence and mobilizes the construction of supporting EV infrastructure and services.

Nonetheless, supply-side policies face the risk of political resistance from automakers. Therefore, policy-makers, especially in countries like Canada and Germany, where automakers are politically influential, usually attempt to avoid the political consequences of such mandates and corporate regulations.

Conclusion

Government subsidies are vital to the growth of EV sales. Research at the Institute of Transportation Studies at the University of California Davis demonstrated that we can achieve peak oil demand by 2030 if governments aggressively encourage drivers to switch to electric cars and mandate fuel efficiency.

As the shift towards EV spreads around the world, California and Norway serve as excellent models for demand-focused and supply-focused policy packages. However, there is no simple answer for which strategy is best for a given region. California and Norway’s success with electrification policy are partially attributed to their unique cultural and political contexts. Any other region or government seeking to model their EV agenda off these two examples must consider both the trade-offs and divergent circumstances it will face.

However, the one condition proven by both strategies is that to be successful, EV policies must be “big.” While many regions around the world have installed EV policies, they are too temporary and small-scale to make a noticeable difference in EV sales in the long term.

The only way for policy to truly pave the way for an electric vehicle turnover is to adopt the rigor of California and Norway’s programs: whether it be implementing large financial incentives for a long duration or enacting durable regulation to mandate EV development and production.

By Yani Li