Regulatory commitment versus non-commitment: Electric vehicle adoption under subsidies and emission standards

Abstract

We compare two regulatory structures in the application of emission standards and a subsidy scheme in the automobile market. The regulator can either commit to an emission standard or is not able to commit. Firms compete á la Cournot and produce fuel-powered and electric vehicles. The emissions of fuel-powered vehicles can be abated by means of investing in emission-reducing innovation. Our results indicate that under commitment there are less emissions, higher subsidies and a major adoption of electric vehicles. By contrast, non-commitment yields more fuel-powered vehicles, more vehicles in total and higher consumer surplus. Electric vehicle producers obtain higher profits under commitment, whereas fuel-powered vehicle producers might be better off under both regulatory structures. Social welfare is higher under non-commitment as long as environmental damages are regarded severe. Otherwise, commitment is socially preferable. This result provides an explanation for observed differences in the duration of environmental standards between the US, the EU and China.