How to promote green cars

June 02, 2017 Energy

If customers are to buy a ‘green car’ that runs on alternative fuel, they need access to plenty of suitable filling stations. Meanwhile, stations are unlikely to install alternative fuel pumps if there are few ‘green cars’ to use them. But fuel supply is seldom considered in analysis of the adoption of environmentally friendly vehicles. Using a rich dataset from the Italian market, TSE postdoctoral research fellow Giulia Pavan has written the first paper to propose a fully fledged demand and supply model to study the incentives for adoption of alternative fuels.

In Giulia’s joint model, potential green car customers consider the price and the density of stations offering alternative fuels, such as liquified petroleum gas (LPG) and compressed natural gas (CNG). At the same time, filling stations only install alternative-fuel pumps if there are enough customers driving green cars in the area. Giulia uses this framework to compare the effectiveness of different environmental policies designed to boost adoption of green cars.

The setting for Giulia’s study is the Italian market, which is characterized by a high share of new LPG and CNG cars and a heterogeneous dislocation of filling stations among markets. She assembled a novel dataset, collecting data on car sale price, fuel type and other characteristics for newly purchased cars by private holders and merging it with information on location and range of fuels offered by Italian filling stations in 2012. She was also able to exploit differences in local legislation relative to traffic limitations for traditional fuel cars, reduced taxes for alternative-fuel vehicles and laws requiring filling stations to supply at least one alternative fuel.

The main takeaway of Giulia’s demand model is that consumers are sensitive to fuel availability and this effect is especially strong for alternative fuels. On the filling station side, her estimation implies that the fixed cost of adding an LPG pump is €41,681 while adding a CNG pump is €163,388.

Using her demand and entry estimates, Giulia compares two policies: a €2,000 rebate on the price of alternative-fuel cars and a 50% subsidy for the installation of an alternative-fuel pump. She finds that subsidizing consumers would increase the share of LPG cars by 30% and CNG cars by 33%, leading to a 3% and 5% increase in the density of filling stations. Subsidizing filling stations would increase the availability of alternative fuels by 60% and 66% for LPG and CNG respectively; increasing car share by 17% and 96% for LPG and CNG respectively. These results suggest that subsidizing fuel retailers to offer alternative fuels is an effective policy to indirectly increase low-emission car sales.

However, Giulia emphasizes that the two policies’ results are mixed and should be evaluated at the local market level. The higher cost effectiveness of the price rebate is due to the substitution between traditional-fuel and alternative-fuel vehicles, which is smaller in case of filling-station subsidies. Although consumer rebates are more effective in terms of CO² per car reduction, they do not indirectly support the entry of filling stations. Therefore, the effect of the policy would disappear once the subsidy expired. On the other side, the effect of a filling-station subsidy on alternative-fuel market shares would be more persistent since filling stations would remain in the market. Both policies imply, on average, a 1% CO² reduction per car, showing high variability among markets.