This section details proposals for improving the EV purchase subsidy policy in Korea. The suggested proposals are based on lessons gleaned from subsidization failures, EV subsidization trends around the world, and the results of the opinion poll and simulations conducted as part of this study.
First, failed subsidies and EV subsidization trends worldwide serve to highlight the following issues with the current Korean EV subsidization policy.
At present, Korea lacks a long-term, systematic plan for meting out EV purchase subsidies over time. The Korean government has yet to determine the amount and timeline of EV purchase subsidies; therefore, EV purchase subsidy amounts are highly susceptible to market fluctuations and changing EV demands. Although the flexibility of the current EV subsidies can be viewed as advantageous in some ways, it also has the critical disadvantage of causing consumers to doubt the continued reliability of government EV subsidies. This lack of consumer confidence has the potential to adversely affect the EV market.
Another weakness of the current system is that there are no market mechanisms in place to induce consumers to make eco-friendly choices. Simply put, Korean EV subsidy amounts do not reward consumers for making eco-friendly choices and do not properly reflect the environmental contributions of EVs. Consumers are willing to purchase EVs, despite their significantly higher prices, primarily because of their eco-friendliness. EV purchase subsidies should therefore be redesigned to reward and encourage consumers’ eco-friendly choices.
Yet another flaw of current EV purchase subsidies is that they are aimed at reducing the initial purchase price of EVs, benefiting only consumers. In order for Korea’s subsidization policy to be successful, it must also benefit those who need it the most—i.e., service providers. Although increasing subsidies for consumers would increase the direct network effect on the EV market, increasing subsidies for charging service providers would increase the indirect network effect. The subsidization program must be designed to maximize both types of effects.
Up until now, the Korean government has applied the same subsidy amount to each EV purchase, regardless of vehicle model or size. Starting next year, however, subsidy amounts will be differentiated based on driving distances and mileages (kW/km). This may be a sign that the EV subsidization policy in Korea is improving.
Second, the opinion poll and simulations conducted as part of this study provide several important implications for the future of EV subsidies in Korea.
Both the opinion poll and simulations underscore the need to expand the nation’s EV charging infrastructure. In fact, the current lack of infrastructure is by far the greatest obstacle to raising EV demand.
Furthermore, it is important to continue to lower the initial purchase prices of EVs as much as possible to increase EV demand. If EV subsidies are eventually discontinued and EV prices still remain high, EV demand will soon subside.
Measures must be found to ensure that initial EV purchase prices are competitive, even in the absence of government subsidies.
Moreover, the EV models available on the market should be diversified. The Korean EV market today is almost exclusively dominated by compact and small-sized models. There is, however, growing demand for medium-to-large and sports utility vehicles. EVs of these larger classes should be developed in order to increase the appeal of EVs to a wider range of consumers.
It is also important to increase benefits and incentives for consumers making eco-friendly choices. Policy mechanisms should be devised so that the social and environmental benefits of using EVs are returned, at least in part, to EV owners.
In addition to subsidies, incentives are needed to ensure continued technological innovations. EV purchase subsidies are an important policy instrument for raising EV demand, but they are not, in and of themselves, enough to guarantee the success of EVs in Korea. These purchase subsidies should be accompanied by policy incentives promoting the innovation of EVs.
In light of the aforementioned issues with the current EV purchase subsidization policy in Korea, highlighted by the opinion poll and simulations conducted as part of this study, we will now provide the following implications for the possible improvement of the EV subsidization policy in Korea.
First, the EV subsidization policy should be redesigned to increase both the direct and indirect network effects on the EV market. This should be done by identifying those most in need of the subsidies and determining how the subsidies can be used to create new market opportunities.
Second, the EV subsidization policy should be designed in such a way that it does not discourage manufacturers from active research and development. It is crucial for policymakers to find ways to avoid the problem of lack of motivation that commonly plagues many subsidization programs.
Third, a long-term plan is needed to convince consumers of the reliability of EV purchase subsidies. Long-term planning should involve determining the gross amount of subsidies and the initial amount of subsidies.
Fourth, the EV subsidization program should be designed so that the positive externalities of EV use directly benefit EV users. Therefore, policy discussions should focus on identifying the positive externalities of EV use and establishing measures to ensure that EV consumers are rewarded in turn.
1. Increasing Network Effects
The two most important factors in raising EV demand are lowering EV prices and expanding the charging infrastructure.
Decreasing EV prices enhances the direct network effect on the EV market by inducing more consumers to choose EVs over conventional vehicles. Expanding the charging infrastructure, on the other hand, increases the indirect network effect on the EV market, causing consumers to choose EVs over conventional vehicles due to increased accessibility and ease of charging.
At present, the Korean EV subsidization program is aimed largely at reducing the initial EV purchase price for consumers.
Theoretically, decreasing the EV purchase price increases EV demand and induces private-sector investments to enter the EV charging market, ultimately giving rise to a self-sufficient private charging service market. Unfortunately however, this kind of virtuous cycle, envisioned by the designers of the current EV subsidization program, has yet to materialize. As seen in our opinion poll, the largest obstacle to raising EV demand in Korea is the shortage of charging facilities. Although the Korean government has created many of the country’s existing charging facilities, its goal is to induce private-sector companies to invest in and expand the nation’s charging infrastructure. The government-led process of expanding charging infrastructure, however, has had the opposite effect and has crowded out the desired private-sector investment. What’s worse is that EV drivers primarily charge their vehicles at home or work. As charging stations at homes or at work pose serious competition to potential charging service providers, there is little opportunity for potential investors in the private- sector charging infrastructure. Potential charging service providers are also forced to compete with public charging stations installed by the government. Therefore, given the current charging practices in Korea, investors can expect little return on their investment in private-sector charging stations.
If, however, some of the fiscal resources already assigned to EV purchase subsidies are diverted from consumers and used to subsidize private-sector investments in the charging market, the remaining subsidy amount would not be enough to encourage EV purchases. EV demand would not be able to increase as the initial EV purchase cost would still be too high. The existing budget for EV purchase subsidies must therefore continue to be used solely to lower the initial cost of EV purchases.
Our review of failed subsidy policies worldwide shows that subsidies typically fail because policymakers do not include those most in need of subsidies as target beneficiaries. In Korea today, both consumers and potential private charging service providers are in dire need of subsidies. Then nation’s EV subsidization policy can only establish a virtuous cycle if both groups can benefit from subsidies.
One way to ensure that EV purchase subsidies benefit both parties is to have potential charging service providers pay for consumers’ EV batteries in return for receive battery charging and lease subsidies. In other words, the current EV subsidy policy should be expanded to include a battery lease program.77 So far, battery lease and EV purchase subsidies have had
77 The battery lease program ended in failure in January 2017. At a meeting between the authors and advisors of this study, Dr. Sohn Sanghun of the Jeju Research Institute identified the internal and external factors behind the cancellation and failure of the battery lease program in Jeju. The main external factor was the shortage of demand. The reform of the public transit system in Jeju led to delays in the development and manufacturing of electric buses, while the Ministry of Environment’s subsidies for the purchase of commercial EVs further weakened the competitiveness of the battery lease program. The internal factors for failure included the hurried planning of the program, the incapability of participants to handle the complex tasks of the battery lease program, and the
a zero-sum relationship. Policymakers, however, can transform this competitive relationship into a mutually beneficial one by redesigning EV purchase subsidies.
If private charging service providers lease batteries to consumers, and consumers receive charging subsidies for the batteries they rent, the government’s EV subsidies would be able to successfully establish an EV charging and battery leasing market. For example, let us suppose that the government provides a subsidy of KRW 15 million for up to 250,000 EV vehicles sold.78 If battery leasing could help consumers save KRW 10 million in EV purchasing costs, the Korean government would only have to provide a subsidy of KRW 5 million per vehicle (saving KRW 10 million per vehicle), even though the end cost of the EV would be the same for the individual consumer. The consumer, however, would be required to pay a monthly fee to the battery provider. The government could then provide the remaining KRW 10 million to the consumer for battery rental fees, on the condition that the consumer rent their battery from a private-sector battery provider.
Private-sector battery providers need incentives to reduce the risks associated with leasing their batteries to EV consumers. Introducing battery leasing into the subsidization program (as outlined above), enables the consumer to purchase an EV at KRW 15 million less than the market price and obtain an additional KRW 10 million in battery charging and lease subsidies. Combining the current EV subsidization program with battery subsidies would give Korean consumers KRW 10 million more in subsidies in excess of the initial KRW 15 million they save on EV purchase prices. For the government, the subsidy amount remains the same at KRW 15 million per EV, whether or not battery subsidies are introduced. However, by re-designing the subsidy program to include battery leasing, the government can naturally induce a new private battery charging and lease market worth KRW 2.5 trillion (KRW 10 million x 250,000 vehicles).79 This initial market size is large enough to attract continued private-sector investments. The battery service providers providing the best services would inherently benefit the most from this new market, eliminating any need for the government to purposely design a business model for a viable private charging market. A subsidization program that includes battery lease subsidies can therefore act as a market-friendly policy mechanism to help create and sustain a private charging market.
Additional Scenario 6 in our simulations posited the growth of a private charging market due to EV purchase subsidies.
In this scenario, as EV subsidies are used to promote greater investment in the private charging market, the charging infrastructure naturally widens, increasing the accessibility of charging stations and services for consumers. This, in turn, encourages more and more consumers to choose EVs. EV subsidies, in other words, can be used to enhance the indirect network effect on the EV market by expanding the charging infrastructure.
Once EV purchase subsidies are no longer available, battery lease subsidies would raise the maintenance cost of EVs.
Even so, however, the maintenance cost of EVs would not exceed that of ICE vehicles. Otherwise, consumers would be better off choosing ICE vehicles over EVs.80
A subsidy program can only be deemed successful if it results in the rise and growth of the targeted market. In order to raise EV demand in Korea, the nation’s charging infrastructure must be improved, but this requires increased private-sector investment. If EV purchase subsidies can be used to give rise to a new EV charging market, private-sector investments in the expansion of charging infrastructure would grow as well. Such incentives for private-sector investment would help establish the virtuous cycle that the designers of EV purchase subsidies have long envisioned.
shortage of the financial resources required for the long-term, large-scale implementation of the program.
Although it can be painful to reflect upon past failures, determining the reasons why a particular program failed is critical in order to rethink and redesign a better program to achieve the same objectives. This is the key to the diffusion of innovation.
Renault France, for example, sold over 100,000 Zoe thanks to its battery lease program (https://electrek.co/2017/03/30/renault- electric-vehicles-lease-battery-upgrade/, accessed November 20, 2017).
78 The Korean government intends to achieve the cumulative sales of 250,000 EVs by 2020, providing KRW 14 million in subsidies for each vehicle (in addition to subsidies from local governments). The discussion of the merging of EV purchase subsidies and the battery lease program is based on the assumption that the Korean government will continue to provide the same subsidies until 2020.
79 The market value of KRW 2.5 trillion is for reference only. The actual market size may vary depending on the amount and timeframe of the government’s EV purchase subsidies.
80 Cost concerns further complicate the battery leasing programs. However, before we estimate the costs of battery leasing, we must first consider the growing discussions and research on recycling the lithium ion batteries used in EVs. Once a lithium ion battery has reached a certain number of lifecycles, it can then be recycled and used as a battery for an electricity storage system (ESS). Used EV batteries, in other words, can be used to create a new market. This means that EV drivers would not need to pay for the entire cost of the battery during the leasing period. Battery lease providers could lower battery leasing prices in anticipation of the returns they could generate in the recycled battery market.
2. Addressing the Ethical Problems
Ethical problems are one of the reasons that subsidization programs fail. Often times, when a subsidy is offered, the companies receiving the subsidy neglect research and development and become unmotivated to develop cost-saving technologies. Subsidies, in other words, often drastically reduce companies’ desire to reduce their costs.
The governments of the United States, the United Kingdom, France, Japan, and China differentiate EV purchase subsidy amounts by battery capacities, carbon dioxide emissions, and driving distances. The Korean government, however, provides the same subsidy for all EVs, regardless of driving distance. This failure to differentiate subsidy amounts acts as a disincentive for automakers to improve the performances of their EVs.
Korean policymakers need to differentiate EV subsidy amounts based on various indicators of vehicle performance, such as battery capacity, driving distance, and mileage. It is important for the government to adopt criteria for policy incentives to encourage automakers to improve their technologies and driving distances. Subsidies should also be provided that encourage the improvement of wintertime driving distances and the reduction of carbon dioxide emissions.
Subsidy criteria should also be differentiated by vehicle type in order to ensure the efficiency of the EV subsidy program.
Subsidy amounts for passenger EVs should be differentiated by performance, while subsidy amounts for cargo and commercial EVs should be differentiated by car type and provided at fixed rates that incrementally decrease over time.
Additional Scenarios 3 through 5 in our simulations show the effects that improved EV technologies, resulting from subsidies, have on EV demand. In a scenario in which EV subsidies are used to improve the mileage, battery charging time, and eco-friendly contributions of EVs by one percent each, improvements in mileage exert the greatest positive impact on increasing EV demand. This is because improved mileage results in improved driving distances.
Table 6-1. Suggested Improvements for EV Purchase Subsidies Vehicle
type Description Subsidization criteria
Passenger EVs
- Mainly used for commuting and driving short distances
- Dozens of models now available - Driving distance/mileage the most important consideration for consumers
- Diversity of models makes it possible to establish performance-based subsidization criteria
- Subsidy amount differentiated, up to a certain amount, based on established criteria
- Criteria to include driving distance, mileage, and battery capacity
Cargo EVs
- Mainly used for moving cargo and freight
- Types differentiated by total bodyweight
- Only limited numbers of models available by weight-based class
- Narrow range of available models makes it difficult to establish performance-based subsidization criteria
- Subsidy amounts differentiated by vehicle class or type
- Cargo EVs: Subsidy amounts differentiated by EV bodyweight and provided at fixed rates
- Commercial EVs: Subsidy amounts differentiated by EV length and provided at fixed rates
Commercia l EVs
- Mainly used for passenger transportation
- Types differentiated by passenger capacity and length
- Only limited numbers of models available by length-based class Source: Lee (2017).81
Another ethical issue associated with subsidies is that they prevent the price of products from going down. Companies receiving subsidies have no incentive to reduce costs or prices for consumers. One way to decrease the price of a subsidized product is to set the product price at the same level as similar products, thereby increasing competition. When presented with a wide range of options, consumers will choose the product that offers them the most for their money. If EV subsidies are able to encourage competition, they will be more successful overall.
81 Unofficial quotes from Lee Min-ha, Secretary-General of the Korea Electric Vehicle Association, given at meeting of policy advisors.
3. Long-Term Planning
Long-term planning is needed to convince consumers of the reliability of the EV subsidy program. Fostering this trust is a key part of ensuring the success of the EV subsidy program.
First and foremost, long-term planning means establishing the gross amount of EV subsidies to be provided over the course of the policy program. The greater the gross amount of subsidies, the greater the effect the program will have on raising EV demand; however, since it is impossible for the government to provide limitless amounts of EV subsidies, an appropriate gross amount must be determined. Once the gross amount has been determined, the initial subsidy amount must be decided. The initial subsidy dictates how long the subsidization program can be maintained, which also affects how much of an impact that the program can have on EV demand. Too great of an initial subsidy can quickly deplete the EV budget, while too little of an initial subsidy can fail to effectively reduce EV prices. Initial subsidy amounts that are too low or too high can hinder the effective fostering of EV demand.
As seen in Scenarios 1 through 9 of our simulations, it is crucial to determine an appropriate initial subsidy amount in order to effectively implement the subsidization program. The initial subsidy amount should be established based on the desired duration of the subsidization program and the desired timeline and extent of EV price decreases. The gradual reduction of subsidy amounts should also be decided based on the rate of EV price decrease, so that the effective prices consumers pay for EVs (retail prices – subsidies) do not rise. Increases in effective prices can dampen the growth of EV demand, ultimately rendering the EV subsidies ineffective.
4. Transferring Positive Externalities to Consumers
A. Substituting Part of Purchase Subsidies with Emission Rights
In Korea, the national government provides EV subsidies in fixed amounts, but the subsidies provided by local governments vary widely. Despite this variance, the sum of national and local government subsidies always exceeds KRW 14 million per vehicle. Critics of EV purchase subsidies argue that subsidies should be discontinued because they benefit the relatively well-off and are an unfair use of taxpayers’ money. Some also question whether the current subsidy amount is justifiable or economically sustainable; this issue is something that must be addressed when discussing the future of EV subsidies in Korea.
The current EV purchase subsidies can be justified based on the fact that they indirectly help reduce the negative externalities of ICE vehicles, such as particulate matter and greenhouse gas emissions. Since the presence of negative externalities upsets the market equilibrium and the socially optimal allocation of resources, the government has the right to intervene in the market by readjusting the relative prices of ICE vehicles and EVs with subsidies to reduce inefficiencies.
The question then is whether the current subsidization program structure is suited to achieving this goal.
First, let us consider the negative externalities of ICE vehicles, particularly the emissions of particulate matter, which contributes to air pollution. EVs are often touted as “pollution-free” alternatives to ICE vehicles, but the electricity needed to operate these vehicles is generated in ways that, by nature, are harmful to the environment. However, although the pollutants emitted by ICE vehicles and EVs are the same in chemical composition, they actually exert quite different effects on the environment.
Of the 560,985 gigawatts per hour (GWh) of electricity generated in Korea in 2016, 320,082 GWh (or 57 percent) were generated from the use of fossil fuels (221,335 GWh from steam turbines, 98,210 GWh from combined-cycle plants, and 573 GWh from internal combustion plants) (KEPCO, 2017, p. 5). Thermal plants are concentrated in Chungcheongnam- do. Therefore, driving an EV anywhere in Korea increases the pollution in the Chungcheongnam-do region, the main region of electricity generation. Driving an ICE vehicle anywhere in Korea, on the other hand, contributes to the pollution of the region in which the vehicles is operated. In other words, both EV and ICE vehicles generate pollutants of the same chemical composition, but these emissions affect various regions to different extents. In the United States, 91 percent of the pollution generated by EVs is transmitted to states other than those in which EVs are driven, while only 19 percent of pollution generated by ICE vehicles is transmitted out of the states in which ICEs are driven (Holland et al., 2016, p. 3).
Since Korea is significantly smaller than the United States, this pollution asymmetry may not be as stark. Nevertheless, it remains certain that the two different types of vehicles exert different polluting impacts on different regions. It therefore