Evaluating second-hand EVs subsidies: the role of vertical and horizontal preferences

Decarbonizing transport is crucial to achieving net-zero emissions, with private cars contributing significantly to greenhouse gas emissions. While subsidies for new electric vehicles (EVs) are common, the recent inclusion of second-hand EV subsidies in several countries raises questions about their economic rationale. Contrary to conventional thinking, we show that while subsidies for second-hand EVs are often justified on equity grounds, they also improve efficiency as they influence the equilibrium composition of the vehicle fleet. Using a theoretical model that incorporates both vertical (vintage) and horizontal (fuel type) differentiation, along with empirical evidence from the French car market, we demonstrate that subsidies for new and second-hand EVs function as complements. By employing both types of subsidies and adjusting them over time, policymakers can achieve substantial welfare gains compared to focusing solely on new EVs.