Which Green Technology to Subsidize? Evidence from Electric Vehicles in South Korea

2026-07-15

AI Summary

This study addresses how to optimally allocate subsidies between clean technologies, such as battery electric vehicles (BEVs), and intermediate technologies, like hybrid electric vehicles (HEVs), to maximize greenhouse gas (GHG) emission reductions. By developing a discrete-choice demand model that incorporates mileage heterogeneity and integrating it with counterfactual policy simulations and carbon accounting, the authors evaluate the emission mitigation efficacy of both subsidy types in South Korea’s passenger vehicle market. Findings indicate that under the current grid carbon intensity, reallocating subsidies from BEVs to HEVs would yield an additional 47% reduction in GHG emissions; BEV subsidies become more effective only when the electricity carbon intensity declines by approximately 45%. The work thus advances a novel perspective—that intermediate technologies can outperform the cleanest alternatives in emission reduction—and quantifies critical thresholds linking power-sector decarbonization and consumer behavior to policy effectiveness.

Abstract

We develop a framework to compare the relative effectiveness of subsidizing alternative emission-reducing technologies. We show that an intermediate technology may reduce emissions more effectively than the cleanest technology if it induces sufficiently greater substitution away from the prevailing high-emission technology. We apply the framework to the South Korean passenger vehicle market using a demand model that incorporates mileage heterogeneity, an important determinant of fuel-type choice. First, reallocating existing subsidies from battery electric vehicles (BEVs), the cleanest technology, to hybrid electric vehicles (HEVs), an intermediate technology, would reduce total greenhouse gas emissions by an additional 47%. Second, for a BEV-focused subsidy policy to outperform an HEV-focused policy, the carbon intensity of electricity generation would need to fall by approximately 45%. Our findings suggest that HEV subsidies remain more effective than BEV subsidies until consumers become sufficiently willing to switch to BEVs or electricity generation becomes sufficiently decarbonized.

Problem

• green technology
• subsidy
• electric vehicles
• emission reduction
• technology choice

Innovation

• subsidy effectiveness
• intermediate green technology
• emission reduction
• vehicle electrification
• carbon intensity of electricity