Policies for Electrification of Cars in the Short and Long Run

We study the optimal combination of short and long-lived options for reducing greenhouse gas (GHG) emissions, using electrification of the car fleet as an example. A transition to electric vehicles (EVs) can be incentivized by subsidies on purchases of EVs and increased density of fast chargers. Subsidizing purchase only leads to emissions reductions in the next few years (static option), whereas investment in infrastructure will reduce abatement costs in several years (dynamic option). We find that the dynamic option may be profitable even if it is more expensive. A higher expected abatement cost in later periods most likely makes it even more profitable to use the dynamic option. Numerical simulations for Norway confirm the results of the theory model. The presence of an international permit market affect the combination of static and dynamic abatement. This stresses the importance of early and time consistent plans for international regulations of GHG emissions