The causal effect of purchase subsidy removal on electric vehicle demand: evidence from New Zealand's clean car discount
Using a regression discontinuity design on New Zealand's abrupt removal of its Clean Car Discount, this paper provides causal evidence that eliminating purchase subsidies caused an immediate, permanent, and substantial 24.1 percentage point drop in battery electric vehicle market share, revealing a highly elastic demand driven by marginal buyers in a nascent market with no subsequent recovery.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
Governments often use financial help to encourage people to buy electric vehicles, hoping to speed up the switch away from cars that run on gasoline. This strategy relies on the idea that if the price is low enough, more people will make the change. However, a crucial question remains for policymakers: what happens when that financial help is taken away? Does the market simply adjust to the higher price and keep growing, or does the demand for electric cars collapse? Understanding this is vital because many nations plan to eventually stop these subsidies, but they need to know if doing so will derail their environmental goals or if the transition is strong enough to stand on its own.
A recent study from New Zealand offers a clear answer to this question by looking at a specific moment when a government subsidy was suddenly removed. New Zealand had a program called the Clean Car Discount, which gave buyers a cash rebate when they purchased a new electric car. The program ran for about twenty months before the government announced it would end abruptly on December 31, 2023. This sudden stop created a perfect natural experiment. Researchers could compare the weeks just before the deadline with the weeks immediately after, observing exactly how consumer behavior changed when the extra money disappeared. The study focused on the share of electric cars among all new cars sold, rather than just the total number of cars, to ensure that the results reflected a change in choice rather than a general slowdown in the economy.
The findings reveal a dramatic and immediate reaction. As soon as the subsidy was removed, the share of new electric cars sold dropped sharply. In the weeks following the cutoff, the proportion of electric vehicles among all new registrations fell by roughly 24 percentage points. Before the subsidy ended, electric cars made up about 10 percent of new sales; afterward, that figure plummeted to just over 2 percent. This was not a temporary dip. The data shows that the market did not recover over the following two years. The demand remained low, suggesting that the removal of the subsidy caused a permanent structural change rather than a brief pause in buying.
The researchers also looked at what happened in the weeks leading up to the deadline. They found that consumers were watching the clock closely. In the final eight weeks before the subsidy ended, there was a massive spike in sales, with over 1,200 more cars sold than would have been expected based on normal trends. People rushed to buy their vehicles before the extra money vanished, effectively borrowing demand from the future. However, this anticipation did not save the market in the long run. Once the deadline passed, the sales volume did not bounce back to its previous level. Instead, the market settled into a new, much lower baseline.
The study provides strong evidence that the effect was permanent. Over the next twenty-four months, the number of electric cars sold each week remained significantly lower than it would have been if the subsidy had stayed in place. There was no sign of the market adapting or finding a new equilibrium at the higher price. The drop was so severe that it suggests the subsidy was not just a small bonus for buyers, but a decisive factor for a large group of people who were on the fence about purchasing an electric car. Without that financial nudge, they simply chose not to buy one.
Interestingly, the study found that this drop did not mean people switched to buying used electric cars or gas-powered vehicles. The sales of used electric cars did not increase to fill the gap, and the sales of gas-powered cars were not significantly affected by the policy change. This indicates that when the subsidy disappeared, many buyers did not switch to a different type of car; they simply stopped buying a new car altogether. The demand for new electric vehicles in this market appeared to be highly sensitive to price, with the subsidy acting as a critical bridge for many buyers.
The research also highlights that the impact was not felt equally across all types of buyers. The drop in sales was most severe for new cars and for buyers in the mass-market segment, who typically purchase more affordable models. In contrast, the market for used electric cars showed almost no change. This suggests that the buyers who were most dependent on the subsidy were those looking for new, entry-level electric vehicles. For them, the subsidy represented a significant portion of the total cost, and without it, the price became too high. The study calculates that for every 1 percent increase in the effective price of a new electric car, demand fell by about 8 percent. This level of sensitivity is much higher than what has been observed in larger, more mature markets like the United States or Germany, where buyers seem less dependent on subsidies.
Ultimately, the New Zealand case offers a stark lesson for other nations considering how to manage the transition to electric vehicles. The removal of a purchase subsidy did not lead to a temporary disruption followed by a recovery. Instead, it caused an immediate and lasting collapse in demand for new electric cars. The market did not prove strong enough to absorb the price increase on its own. For policymakers, this suggests that removing subsidies too early, before the market has matured and infrastructure is fully established, carries a high risk of stalling the entire transition. The evidence shows that for a nascent market dominated by price-sensitive buyers, the financial incentive is not merely a helpful extra; it is often the deciding factor that keeps the market moving.
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