Reducing emissions from the transportation sector is essential to building a sustainable and forward-looking economy in the United States. As the largest source of greenhouse gas emissions in the country, the transportation sector contributes 29% of total emissions, with personal vehicles alone contributing 58% of these. This underscores a critical opportunity for decarbonization in personal transportation. As the world grapples with climate change, transitioning to electric vehicles (EVs) offers a promising path to quickly reduce these emissions. This analysis places U.S. EV adoption in a global context and identifies initial policy recommendations to accelerate decarbonization in this vital sector.

U.S. EV market performance among the global top emitters

Recent data indicates that the top ten greenhouse gas (GHG) emitters collectively account for approximately two-thirds of global emissions. The U.S. ranks second among these emitters, both from production-based and consumption-based perspectives. The other leading emitters are China, India, Russia, Japan, Iran, Germany, Indonesia, South Korea, and Saudi Arabia.

Figure 1 illustrates recent progress in EV adoption in the U.S., where EVs accounted for 9.5% of new car sales in 2023. Despite this growth, the U.S. still trails other major emitters like Germany (24%) and China (38%) in EV sales share; it surpasses other prominent emitters. While South Korea had a higher EV sales share than the U.S. in 2022, it fell behind in 2023. A closer examination of EV policy incentives in the U.S., China, Germany, and South Korea is necessary to determine the key drivers of EV adoption in these countries and to determine which policies are most effective for accelerating this transition.

Generous government subsidies and the presence of a carbon price

U.S.

The U.S. introduced its first EV tax credit under George W. Bush’s Administration in 2008, offering up to $3,400 per vehicle, limited to the first 60,000 cars produced per manufacturer. In 2009, the Obama Administration increased the credit to $7,500, and the 2022 Inflation Reduction Act (IRA) continued the benefits. 

However, the current program has a limited scope, focusing only on models assembled in North America, equipped with batteries partially (and eventually fully) manufactured in North America, and using a specified amount of critical minerals from friendly countries. This narrow approach may be inefficient, potentially slowing the decarbonization process by restricting the range of eligible EVs.

China

China’s transition to EVs was significantly boosted by its early implementation of New Energy Vehicles incentives such as rebates and purchase tax exemption that started in 2009. Between 2009 and 2017, these incentives allowed Chinese EV buyers to pay, on average, only 57.6% of the original vehicle price. Combined with subsidies from local governments, direct financial incentives could reach up to $16,000 per car in 2015. Strict vehicle control policies in major cities–where obtaining a car permit can cost up to $11,000–further encouraged EV adoption. Since EVs are exempt from license plate restrictions, the total potential savings for EV buyers in cities like Shanghai could reach $28,000 when factoring this exemption.

China launched its national carbon emission trading system in 2021, a milestone that, while recent, was built on years of preparation. Initial discussions around a national carbon market began in the early 2010s, leading to the launch of several regional pilot programs in 2013. Insights from these pilots helped shape the national system, which was officially announced in 2017 before its full-scale launch in 2021. This lengthy lead-up provided Chinese manufacturers and consumers with at least eight years of advance notice, potentially influencing long-term purchasing decisions and fostering a favorable environment for EV adoption.

Germany

Germany has promoted EV adoption since 2011 through robust incentives aimed at reducing upfront costs. Buyers of fully electric vehicles can receive subsidies of up to €9,000 (approximately $10,000), which combine federal and manufacturer contributions. Additionally, EV buyers benefit from a 10-year exemption from the annual circulation tax for first-time registrations until the end of 2025, along with reduced company car taxes for EVs.

Germany's carbon market efforts are supported by the European Union's Emissions Trading System (EU ETS), launched in 2005 as the world’s first major carbon market and a key element of EU climate policy. To address emissions from sectors not covered by the EU ETS–such as transport and buildings–Germany began developing a national system in the late 2010s. This led to the introduction of the German National Emissions Trading System (nEHS) in 2021. Given the influence of these policies, European consumers may be more inclined to choose carbon-efficient products, even if they come at a premium, due to available subsidies and a broader awareness of environmental impacts.

South Korea

Since 2011, government policy has been the primary catalyst for clean vehicle adoption in South Korea. At the point of purchase, government support includes purchase subsidies and reductions in individual consumption tax. Initially, in 2011, tax incentives for new EV buyers were set at up to 4.2 million KRW (approximately US$3,590). By 2023, maximum subsidies vary by region and can reach up to $18,400 in some areas. During ownership, additional support includes the expansion of charging infrastructure and assistance with various costs, such as exemptions from congestion fees, reduced public parking fees, and lower electricity prices.

South Korea launched its Emissions Trading System (K-ETS) in 2015, becoming the first nation in East Asia to establish a nationwide carbon market. The K-ETS targets large emitters across sectors such as power, industry, and aviation, without directly impacting the retail market. However, as seen in other regions that have implemented carbon pricing policies, these market signals are expected to gradually influence the broader market.

Conclusion

Several factors may contribute to why China and Germany are ahead of the U.S. in EV adoption:

  • Larger government subsidies: In China, EV buyers can receive direct financial incentives that can amount to as much as $16,000 per vehicle, while Germany offers up to $10,000 in subsidies for fully electric vehicles without accounting for charger incentives. In contrast, the U.S. provides a federal tax credit of up to $7,500, with a bonus of up to $1,000 for home chargers and associated energy storage that started last year.
  • Carbon pricing: Both China and Germany have national carbon pricing mechanisms, with Germany participating in the EU’s emission trading system, signaling potential lower total cost of ownership in the long run to EV buyers.

The disparity between U.S. vs Chinese and German EV adoption may stem from several factors, including the relatively more generous subsidies available in China and Germany, as well as the presence of direct carbon pricing mechanisms in these regions. By implementing thoughtfully designed policies that provide clear price signals to the market, the U.S. can accelerate the decarbonization of its transportation sector and close the gap in EV adoption.