Ambitious energy density requirements hinder progress: Unintended effects of new energy vehicle subsidies on battery

Financial incentives aimed at enhancing technical metrics are commonly used to promote technological advancement. A primer example is the new energy vehicle (NEV) subsidies in China’s car market, which are based on battery density. This study, however, reveals a significant correlation between increased energy density requirements for batteries under China’s NEV subsidy and an increase in reported battery failures. In striving to meet such requirements, manufacturers prioritize technical metrics over battery safety. We find that for vehicles released after the government started giving subsidies based on battery density, the extent to which battery failure cases are higher compared with other types of failure is more than twice the difference seen in vehicles that came out before the subsidy policy. Furthermore, we observe a relative increase of 13.3% in the likelihood of battery failure for models that barely meet the density requirements. This effect is particularly pronounced for firms with weaker technological capabilities and higher complaint rates. These findings emphasize the need for policymakers to carefully assess the potential unintended consequences of attribute-based subsidies. While the aim is to enhance specific technological indicators, it is necessary to consider the broader effects on nontargeted attributes.