Can new energy vehicles subsidy curb the urban air pollution? Empirical evidence from pilot cities in China

Abstract New energy vehicles (NEVs) are considered as the potential measure to address urban air pollution, and the Chinese government has launched a pilot subsidy scheme to improve its market penetration. We explored the environmental effects of subsidy on urban air pollution from the extensive and intensive margins and formulated a detailed panel dataset, covering 286 cities in China over the years 2006–2018. Moreover, the PSM-DID method and the instrumental strategy are used to confirm the robustness and validity of empirical results on the basis of comprehensive analysis of potential endogenous issues. The results indicate that the implementation of NEVs subsidy policy could significantly improve urban air quality in general, and as the subsidies scale increased by 1%, air pollution level will be reduced by about 0.15%. Then, from the perspective of the dynamic effect of subsidy, it not only has remarkable current environmental effect, but also an effective technology route in the long run. Simultaneously, compared with traditional intervention tools, subsidies enhance the diffusion of NEVs, reduce emissions of air pollutants while meeting residents' travel needs, and thus achieve incentive compatibility, which is the micro-foundation of environmental improvement. Nonetheless, we cannot simply believe the assertion that NEVs subsidy has positive environmental benefits to each region, as the non-clean generation of electricity in some areas will offset the potential environmental benefits. Additionally, the accelerated phase-out of NEVs subsidies at this stage may cause negative externalities of economy and environment, resulting the deadweight loss of industrial dividends accumulated in the early period. Based on above findings, governments should implement more flexible stimulus policies consistent with NEVs industry developments, rather than drastically reducing subsidies, while paying close attention to decarbonization of energy production stage.