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Darla Moore School of Business

Research assesses the effect of governmental incentives on green vehicle purchases

Marketing assistant professor Cem Ozturk and his colleagues recently published research about hybrid vehicles and how governments’ incentives for more environmentally friendly practices can impact consumer choices for green and non-green vehicles.

Specifically, Ozturk and his research team looked at the incentives in two U.S. states that allow green vehicles single-occupancy permission to use the HOV lanes. With Ozturk, the research team included Cheng He, a marketing assistant professor at the University of Wisconsin-Madison; Chris Gu, a marketing assistant professor at Georgia Tech; and Jorge Mario Silva-Risso, a marketing professor at the University of California, Riverside.  

The team found similar results to related studies that there is an insignificant association between the incentive launch and green-vehicle demand; however, they found that the termination or ending of the HOV incentive decreases the unit of sales of green vehicles that would have benefited from the incentive by 14 percent.

Read below as Ozturk explains their research.

For your paper, “The End of the Express Road for Hybrid Vehicles: Can Governments’ Green Product Incentives Backfire?” why did you focus on HOV lanes? 
We focused on the HOV-lane incentives because, in recent years, governments have increasingly turned to “free” methods of stimulating green-vehicle demand: nonmonetary incentives such as waivers from high occupancy vehicle (HOV) lane restrictions. Although only 19 states in the United States adopted monetary incentives as of 2019, a total of 36 states implemented nonmonetary incentives. Despite the prevalence of such nonmonetary incentives, their impact on consumers’ adoption of green products remains controversial. Also, little is known about how these incentives influence the demand for products that are not covered by the incentives (e.g., non-green products), as well as other sustainable behavior (e.g., carpooling). The lack of empirical evidence on these relationships results in an unclear picture of the effectiveness of governments’ nonmonetary green-product incentives in boosting demand for green products and reducing greenhouse gas emissions.

What were your and your colleagues’ findings in this paper? 
The key findings of this study include the following:

  • First, unit sales of vehicles covered by the HOV incentive (i.e., hybrid vehicles) reduce by 14.4 percent following the incentive ending. In contrast, on average, green vehicles that are not covered by the HOV incentive (i.e., plug-in hybrid and electric vehicles) and non-green vehicles (i.e., gasoline) do not experience a change in unit sales after the HOV incentive termination.
  • Second, the HOV incentive termination has an immediate negative effect right after the announcement of the termination, and it persists in the medium term (i.e., six months after the incentive termination).
  • Third, in line with the time-saving mechanism, the HOV incentive termination has a more negative sales effect on vehicles covered by the incentive in counties with longer commute times and those with higher-income levels.
  • Fourth, the launch of the HOV incentive results only in an insignificant 1.61 percent increase in hybrid vehicle sales. Combined with the 14.4 percent reduction in hybrid vehicle sales following the HOV incentive termination, this result suggests that the effect of termination is not simply the opposite that of the launch.
  • Fifth, following the HOV incentive termination, 1) consumers substitute to non-green vehicles with high tailpipe emissions, 2) the new-car market diminishes and 3) the percentage of carpoolers increases.

From your study, how useful are governments’ green-products incentives? 

  • First, given the negative effect of the HOV incentive termination on green-vehicle sales, policymakers need to consider long-term, adverse consequences of a green-vehicle incentive. The significant decline in hybrid vehicle sales after the HOV incentive termination happened more than a decade after the introduction of hybrid vehicles into the market. This implies that green-vehicle adoption has become partially reliant on the incentive even in the long term. 
  • Second, our finding that the negative impact of the HOV incentive termination is greater than the insignificant positive impact of the launch implies that nonmonetary incentives such as the HOV incentive can be counterproductive in terms of stimulating demand for green vehicles.
  • Third, although the HOV incentive may not be effective overall, our results suggest that it does generate additional green-vehicle sales in markets where consumers have longer commute times and higher income.
  • Fourth, our findings suggest that policymakers should also consider the impact of the HOV incentive on demand for non-green vehicles, the size of the market and carpooling behavior while assessing the broader environmental impact of the incentive.

What other alternatives could governments consider for green-products incentives? 
In a follow-up paper being drafted, we show that monetary incentives such as tax credits could successfully stimulate demand for green products. Specifically, we find that the tax credit incentive is more effective in increasing the sales of incentivized green vehicles in counties where 1) consumers are more likely to consider plug-in hybrids regardless of the incentive (i.e., Democratic counties), and 2) consumers value cost-saving more (i.e., counties with lower-middle income). The tax credit incentive leads to around 24.2 percent more plug-in hybrid sales in Democratic counties relative to Republican counties. These findings on the local heterogeneity in the tax credit incentives' success inform policymakers regarding where these incentives prove most effective.

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