If you build it, they will come: Lessons from the first decade of electric vehicles

The diffusion of electric vehicles (EVs) faces multiple economic and technological challenges including the high upfront purchases cost of EVs, limited driving range, the lack of adequate charging infrastructure and long charging times.

To address these challenges, governments around the world have provided various incentive policies to promote the adoption of EVs.  Since the introduction of Chevrolet Volt and Nissan Leaf as the first mass-market EV models into the U.S. market in late 2010, the global EV sales have increased from virtually zero to 3.2 million units sold in 2020. Nevertheless, EVs only made up 4.2% of the new vehicle market in 2020. The diffusion process needs to accelerate significantly in order to reach the EV adoption goals set by many countries and regions.

To improve our understanding of this issue, a recent research paper from the World Bank Infrastructure Chief Economist’s Office –The Global Diffusion of Electric Vehicles: Lessons from the First Decade– uses the most comprehensive data ever compiled on global EV sales and policies to addresses three questions of critical policy importance.

"Electrifying the transportation sector coupled with a clean electric grid is a valued pathway to reaching carbon neutrality."

What are the impacts of various government incentive policies in promoting the sales of EVs?

The expansion of the global EV market has been supported by generous government financial incentives, such as direct purchase subsidies, tax credits or tax exemption.  Norway has the most aggressive purchase incentives for EVs in the world – at an average of around $8,800 per vehicle from 2014 to 2018; versus around $6,000 in the United States and around $3,000 in China.

In addition to financial incentives, some governments have also adopted a variety of non-financial incentives for EV purchases, such as road access privilege and dedicated parking spaces. In addition, many countries issued distinctive-looking green plates for EVs, allowing EVs to stand out on the road as well as facilitating the implementation of free parking or HOV lane privileges.

Such incentives have played a crucial role in glob EV diffusion. In terms of consumer subsidies, the total financial incentives amounted to $43 billion from 2013 to 2020 in the top 13 EV markets, and were responsible for inducing around 40% of total EV sales during the period. In addition, the low-cost policy – green license plates for EVs – has worked surprisingly well, contributing almost 20% of total EV sales in China during the same period.

What is the relative cost-effectiveness of government incentive policies?

The EV market is characterized by network effects. The demand for EVs depends on the availability of publicly accessible charging stations, and, in turn, the supply of charging infrastructure depends on the installed base of EVs to use the stations. This means that policies which strengthen one side of the market could help the development of the other side of the market as well. The government faces a choice between subsidizing EV purchases (demand) or supporting investment in charging stations (supply) or some combination of the two . The question is whether or not the policies on either side of the market are equally effective in promoting EV sales – the so-called chicken-and-egg problem.

Our research shows that right now, subsidizing charging infrastructure is much more cost effective than subsidizing the purchases of electric vehicles. Governments have a choice in how they invest. For $10,000-$13,000, a government can directly subsidize one consumer EV purchase. Or it can spend the same amount to support charging infrastructure, inducing the consumers to purchase of up to 8 of EVs. In other words, investing in charging infrastructure is 4-7 times more cost-effective for promoting EV adoption than providing consumer subsidies.  In fact, if the entire $43 billion dedicated to consumer subsidies had been redirected to supporting the construction of charging stations, the cumulative induced EV sales in the 13 countries would have increased threefold. This indicates that subsidizing charging stations is far more cost-effective than subsidizing vehicle purchase.

What are the key market and policy drivers behind the spatial disparities of global EV diffusion?

EV diffusion has been highly uneven even across countries, even between those with similar socio-economic characteristics. The EV market share ranges from 67% in Norway, to over 20% in Sweden and Netherlands, and 3-5% in China, Spain, Canada, and USA. Analysis shows that these differences owe much more to variations in the density of charging infrastructure than they do to the level of financial incentives. Moreover, the variation of EV market shares would be reduced by 69% among the top 13 EV countries if all countries had the same size of charging network (at the global average). Whereas the dispersion of EV market share would be only reduced by 17% if all countries had the same level of subsidies for EV purchase.

Although offering consumers generous subsidies is the most widely-adopted policy by governments desiring to support the EV market, it is not the most cost-effective option. Results suggest that the early stage of the EV market might be reasonably characterized with a signature line from the 1989 movie, “Field of Dreams", “If you build it, they will come" – something that cannot always be taken for granted when it comes to infrastructure. Building charging infrastructure is a cost-effective strategy for governments to leverage the network effects of the EV market.  Governments could also help promote wider EV adoption at negligible fiscal cost through relatively inexpensive, non-financial policies such as green license-plate policy.

#Infra4Dev is a blog series that showcase recent World Bank economic research to explore how Infrastructure is critical for development.

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