Production and decarbonisation of conventional gasoline vehicle automakers under subsidy and regulation policies

ABSTRACT

Decarbonising the transportation sector through electrification is critical to reducing greenhouse gas emissions. To explore the decarbonisation of conventional gasoline vehicle (GV) automakers in GV and/or electric vehicle (EV) production, we develop analytical models under pure subsidy, pure regulation, and hybrid subsidy-regulation policies. We first examine the monopoly GV automaker’s EV market entry intention in each policy and find that it always increases with consumer range sensitivity and subsidy/regulation parameters, but decreases with product substitutability between the two vehicles. Then, we analyse the implication of policy changes on equilibrium outcomes. Our results show that although introducing regulations and removing subsidies have opposite effects on optimal production and driving range decisions, both might stimulate or restrict the GV automaker to decarbonise, depending on the unit carbon emissions of GVs and EVs. Finally, we extend the monopoly model to the duopoly case, showing that while entering the EV market hurts the EV automaker, it allows the GV automaker’s carbon emissions to always decrease with GV credit coefficients. Together with sensitivity analyses on key parameters, our findings provide insights not only for GV automakers to respond to policy changes but also for governments to design incentives for EV diffusion.

KEYWORDS:

• Production
• decarbonisation
• subsidy policy
• regulation policy
• auto supply chain

Data availability statement

Data sharing is not applicable to this article as no new data were created or analysed in this study.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1 The Chinese government ended the subsidy policy on 1 January 2023, after which vehicles registered will no longer receive subsidies. The Biden administration signed the Inflation Reduction Act with tightening EV subsidy reform on 16 August 2022.

2 We also extend the model to the duopoly case, where the market consists of one GV automaker and one EV automaker in Section 6.

3 In practice, the GV automaker may have another production strategy, that is, only producing EVs and giving up the production of GVs. For example, BYD has stopped GV production in March 2022 to focus on EVs. Although many GV automakers including Mercedes, GM, Bentley, Honda, etc., have expressed their intention to exit the GV market in the future, it is not easy for them in the current market environment. Therefore, we ignore this production strategy in this study and focus on how different incentive policies affect the GV automaker’s EV market entry strategies and decarbonisation.

4 https://www.ndtv.com/business/heres-why-maruti-is-not-participating-in-the-ev-race-3553770

5 That is, $\delta <\text{min}\left\{{\delta }^S,{\delta }^H,{\delta }^D\right\}$, where the detailed expressions of ${\delta }^S$, ${\delta }^H$, and ${\delta }^D$ are shown in the proof of Propositions 1, 2, and 3, respectively. This assumption ensures that when the GV automaker enters the EV market, the optimal decisions including EV driving ranges and EV/GV quantities are positive in each policy.

6 To avoid trivial cases, we assume that the production quantity of GVs (EVs) is the same as sales volume (Huang and Zhu 2021). That is, there is no demand uncertainty in the market.

7 It is noted that we are committed to studying how policy changes induced by the introduction of regulations on the basis of a subsidy policy and the removal of subsidies from a hybrid policy, affect the production and decarbonisation of GV automakers. Therefore, we focus our attention on exogenous incentive policies in this study.

8 https://www.tesla.com/blog/tesla-motors-and-toyota-motor-corporation-formalize-agreement-develop-rav4

9 https://www.chinabuses.org/news/2018/0711/article_11574.html

10 In fact, when the GV automaker decides to enter the EV market, there will exist not only product competition between GVs and EVs but also EV competition between GV and EV automakers in the market. If we consider all these competing factors with different parameters in the current model, the equilibrium will become very complex and difficult to resolve. Therefore, we focus on product competition between EVs and GVs.

Additional information

Funding

The authors are grateful for the support from the National Natural Science Foundation of China [grant number 72293601, 72271026].

Notes on contributors

Zhenyang Pi

Zhenyang Pi is a postdoctoral fellow at the School of Management and Economics, Beijing Institute of Technology, China. He received his doctoral degree in Management Science and Engineering from Beihang University, China, in 2021. His work has been published in International Journal of Production Economics, International Journal of Production Research, Computers and Industrial Engineering, etc. His current research interests include supply chain management, operations management, and game theory.