ClearGreen

“Policy should be geared towards raising expectations that the electric car transition will happen quickly. Because of herd behaviour, such expectations can become self-fulfilling.“

The economics of network goods has been overlooked in UK policy design to encourage consumers to switch to electric cars. A network good is one that generates benefits to other people when an individual buys it – that is there are positive externalities. Think of a communications device, like a mobile phone. An individual buying a phone adds to the network of users and therefore creates benefits for other people joining the network. A payment system with a larger number of users will have more retail outlets that accept the new means of payment. With electric cars, more users will lead to greater availability and falling prices for EVs and supporting services like public charging facilities. Exploiting these positive externalities is key to achieving market momentum in the EV transition.

A key feature of network goods is that individuals take into account the size of the network (user base), as well as factors like their own income and market prices, when choosing whether to go ahead and buy the network good. It may be rational to wait and see before buying. EVs rely new technology and people are unsure about the relative costs and benefits of buying one. Collecting information is costly and so observing other people’s choices is a way to learn about the value of new products. This feature has been variously called a social or neighbourhood effect, or more simply herd behaviour. 

However, if too many people adopt a wait and see approach the market will not get going.  It can result in multiple equilibrium in market outcomes for the good and demand can settle at too low a level. This explains why some countries are stuck at a very low level of EV adoption, like Australia, Brazil, Japan and India. Others like Norway and Iceland have achieved a high level of adoption within the space of a decade (Chart 1). Once the market gets going demand can quickly become self-sustaining. This reflects the fact that individuals are more inclined to buy a network good if they see others doing the same. Also as demand for the good rises, economies of scale in supply of new models and associated charging services leads to positive feedbacks encouraging more people to bring forward their purchases.

In the UK, the demand for electric cars has picked up since 2019. The share of battery only and plug-in hybrid cars in private new registrations rose to 24% in 2023 according to the Society of Motor Manufacturers and Traders (SMMT) (Chart 2). However, the majority of new demand is from firm and fleet buyers attracted by generous tax incentives. Only one in eleven individual consumers choose a battery only car reflecting a lack of government incentives to buy and uncertainties about public charging availability.

How can the government accelerate consumer demand for EVs? In the early days of the EV transition, the government offered direct a subsidy to electric car purchases available to everyone through the Plug-in Car Grant (PiCG). This persuaded early adopters of the new technology but was very costly, at £1.4 billion (2011-2022) and was abolished in 2022. There are a host of other less expensive measures that could be used to raise the visibility and benefits of electric car ownership, such as concessions to drive in bus lanes, free city centre parking and exemption from congestion charges. Various studies have shown that lowering road tax and VAT on electric cars can be more powerful incentives to buy than more expensive direct price subsidies. Policy now needs to be more nuanced and, importantly, incentives need to be held in place until the transition to electric cars is more firmly established.

Secondly, consumer incentives must be underpinned by ambitious regulations on car producers. The Zero Emissions Vehicle Mandate (ZEV) will be implemented in 2024 and is the main policy lever to achieve a smooth transition towards an outright ban on the sale of new petrol and diesel cars in 2035 in the UK. The deadline was pushed back by five years in a series of climate policy U-turns by the government last September. This makes it more important than ever that the government sets a credible and ambitious trajectory for a rising share of new sales of electric cars over the next decade and sticks with it. Crucially, policy needs to be geared towards raising expectations that the electric car transition will happen quickly. Such expectations can become self-fulfilling creating the momentum for a sustained switch to EVs.