Driven by rising consumer environmental awareness and mounting concerns over environmental degradation, the new energy vehicle (NEV) sector has experienced rapid expansion. In 2019, China’s NEV sales reached 1.24 million units, positioning the country as the largest NEV market globally. Forecasts indicated that the stock of electric vehicles could reach between 9 and 20 million by 2020, and between 40 and 70 million by 2025. Yet, despite reductions in local air pollution, studies such as Kendall (2018) have shown that greenhouse gas emissions in China fall by only about 30% when electricity generation remains heavily coal-dependent. This underscores the necessity of accelerating clean energy deployment alongside vehicle electrification.
Green investment is a central pillar for overcoming resource constraints and achieving sustainable development. While much of the research has concentrated on reducing emissions during manufacturing, the environmental footprint of vehicles during their operational life is substantial—Saidani et al. (2018) found that 80% of a vehicle’s environmental impact occurs in the use phase. This reality places responsibility on NEV automakers to pursue not only production-focused green technologies but also innovations that mitigate impacts during use, such as advanced battery systems and sustainable materials. Industry examples include Great Wall Motor’s acquisition of stakes in Pilbara Minerals to secure lithium resources, and Dongfeng Motor Corp’s investment in CATL to access leading battery technology.
However, NEVs remain in a research and development-intensive stage, and the high costs of green investment often exceed the capacity of individual automakers. Government intervention becomes critical, both through regulatory mechanisms and incentive schemes. Two primary regulatory approaches for production-phase emissions are cap-and-trade systems and emission-reducing subsidies. Under cap-and-trade, authorities set carbon quotas, and automakers must comply by trading allowances in a carbon market, as described by Hu et al. (2020) and Xu et al. (2021). Emission-reducing subsidies, in contrast, reward automakers financially based on actual emission reductions, with larger abatements yielding greater subsidies.
Addressing the use-phase impacts, governments typically employ flexible subsidy policies that encourage green innovation investment. These include green innovation subsidies—funds provided directly to automakers to offset part of innovation costs—and green product subsidies, which are granted to consumers purchasing environmentally friendly products, thereby boosting market demand. Bian et al. (2020) and Li et al. (2020) note that these mechanisms can stimulate both supply-side technological advances and demand-side adoption.
The study underpinning this discussion models a supply chain involving an NEV automaker and the government, analyzing how regulatory interventions influence optimal decisions on green technology and innovation investments, as well as pricing strategies. Using backward induction to derive equilibrium results, the analysis compares the performance of different subsidy schemes—no subsidy, green innovation subsidy, and product subsidy—and regulatory regimes—cap-and-trade and emission-reducing subsidy.
Case studies from China’s NEV industry illustrate the interplay between corporate investment strategies and policy frameworks. Automakers investing in both production-phase emission reduction and use-phase innovation can benefit from targeted subsidies and regulatory alignment. For example, emission-reducing subsidies may enhance profitability and environmental outcomes when production emissions are the primary concern, while green product subsidies can accelerate consumer adoption of advanced technologies.
The research addresses three key questions: how regulatory intervention affects optimal investment and pricing decisions; which policy instruments yield the best balance of economic benefit, consumer surplus, environmental impact, and social welfare for production-phase investments; and which subsidy strategies achieve similar goals for use-phase innovations. By integrating both phases of a vehicle’s lifecycle into the policy analysis, the study advances beyond prior work that often overlooked the operational impacts of NEVs.
Findings highlight that cap-and-trade mechanisms can effectively constrain emissions but may impose higher compliance costs, potentially influencing pricing and investment levels. Emission-reducing subsidies, while requiring accurate measurement of abatement, can directly incentivize deeper cuts in emissions. On the innovation side, green innovation subsidies support the development of technologies that reduce use-phase impacts, while green product subsidies can create immediate market traction for such innovations.
This dual-focus approach—combining production and use-phase considerations—provides a more comprehensive framework for aligning industrial strategies with environmental objectives. It also underscores the role of government policy in shaping not only the technological trajectory of NEV manufacturers but also the broader market dynamics that determine the pace and scale of sustainable transportation adoption.