Driving the Zero-Emissions Vehicle Transition: The Role of Supply-Side Policies
How supply-side policies can effectively support the supply of zero-emission vehicles.
In 2023, global electric car sales reached nearly 14 million — 18 percent of all new cars sold last year, the IEA estimates. For the global transportation sector to move from 18 percent to exponential adoption of zero-emission vehicles (ZEVs), supportive policy will need to be enacted worldwide, and supply-side policies are one component of this policy equation. These policies can enormously impact ZEV production and adoption, support energy security, improve air quality, and yield better health for local communities.
Supply-side policies can weather political transitions and have already played a key role in shaping the ZEV transition around the world. For example:
- China implemented both a new energy vehicle (NEV) sales requirement and a fuel economy standard.
- The European Union (EU) implemented new CO2 emissions standards.
- In the United States, two notable supply-side policies are encouraging the ZEV transition: the Advanced Clean Cars II (ACC II) — a ZEV sales requirement enacted in California and several other states — and the Inflation Reduction Act’s (IRA) Advanced Manufacturing Production Credit (45X), which supports domestic critical mineral and subcomponent production.
To assess the impact of supply-side policies on ZEV markets and understand their effectiveness and the challenges they face, RMI conducted a detailed, country- and policy-specific analysis. Although the ZEV supply chain includes upstream, midstream, and downstream components, this analysis focused on the downstream, specifically examining policies that support and impact ZEV manufacturers and suppliers.
Below we outline the role of ZEV supply-side policies, considerations for effective policies, global examples, and challenges these policies may encounter. Decision makers around the world can use these insights to craft policies to encourage and support domestic ZEV markets.
For further insights from this research see RMI’s Factbook: Zero-Emission Vehicle Policy — how supply-side policies can impact zero-emission vehicle investment.
The role of ZEV supply-side policies
Supply-side policies (in the context of ZEV market development) encourage or require suppliers to produce increasingly more ZEVs over time. For this article, suppliers are defined as entities that manufacture and/or import ZEVs to increase the supply of vehicles in a specific market. The table below describes different types of supply-side policies.
Supply-side policies fall into two main categories — regulatory and fiscal — and each policy type has distinct challenges in terms of budget impact and political will. Additionally, regulatory and fiscal policies can have different impacts depending on the market's maturity.
The case for supply-side policies: crucial considerations for effective future ZEV policies
Supply-side policies are targeted policies that can be more cost-effective for governments to implement and provide greater certainty to market actors than demand-side policies, in turn driving increased innovation and investment. The advantages of supply-side policies are summarized in the table below.
Additionally, RMI’s research identified specific considerations for the development of successful supply-side policies and how they impact ZEV markets and work in larger policy ecosystems.
Identifying the market stage. When considering what policy mechanism to utilize, it is essential to identify what thresholds the market has reached; for example, is there sufficient product variety, has preliminary infrastructure been deployed, and is there cost competitiveness? Targeted subsidies can help overcome technology and operational risk to support transitions in their early stages. Sales requirements can be leveraged to support broader adoption in more developed markets. Consider the stage of the market and select the best policy type accordingly.
ZEV supply-side policies can vary in complexity. ZEV supply-side policies can be designed differently — some are more complex than others. Fuel economy and fuel efficiency standards represent a more complex regulatory framework. These policies often require the standardization of testing protocols, differing requirements by vehicle type, and the establishment of certified testing centers, leading to a high administrative burden. Consider the complexity level necessary for the market context in which the policy is being implemented.
Varying intricacy of supply-side policies
A whole-systems approach. Both supply-side and demand-side policies are crucial for a successful ZEV transition as the combination considers the entire ecosystem and addresses manufacturers' and consumers' needs and challenges. Such an approach can ensure a balanced, sustainable, and accelerated adoption of ZEVs. Additionally, developing a comprehensive implementation strategy, which coordinates across all necessary stakeholders, both within government and outside of government, is essential for ensuring policies can be rolled out seamlessly. Consider developing a comprehensive policy package and designing a coordinated implementation strategy.
ZEV policies can encourage greater investment in ZEV manufacturing. Policies with clear, measurable targets can reduce investment risk, providing market certainty. By setting stipulations, targets, and specific incentives for ZEV production and sales, policies can actively guide market actors in accurately sizing the market and calculating internal rates of return. Consider policies with clear and measurable benchmarks to help mobilize investment and drive economies of scale.
Identifying the correct policy for the market stage, thoughtfully designing policies, taking a whole-systems approach, and mobilizing finance can enhance the attractiveness of the ZEV market to investors, fostering a robust environment for growth and technological advancement.
Supply-side policies around the world
Analyzing supply-side policies in various geographies highlights nuances and considerations for effectively designing and deploying policy mechanisms in real-world contexts to support ZEV markets.
RMI’s policy gap analysis identified key trends in successful policies and showed how different levers work together to achieve specific outcomes. The analysis found that policies do not operate in a vacuum and are significantly impacted by countries’ unique needs, the larger political environment, and historical manufacturing background. This indicates that stakeholders need to consider the entire policy ecosystem and customize their approach based on unique market needs and constraints.
Policy Gap Analysis Methodology
This research included a policy gap analysis of eight countries and regions — the European Union, Australia, Brazil, China, India, Indonesia, South Africa, and the United States. These markets were selected because they represent the largest ZEV markets globally, provide socioeconomic and geographic diversity, and represent critical markets for the future of ZEV manufacturing and sales.
The analysis covered eight policy categories across three themes — supply-side (regulatory and fiscal), demand-side (regulatory and fiscal), and infrastructure — to assess how policies shape ZEV markets within the selected countries and regions. This study primarily focused on supply-side policies. However, given policy does not operate in a vacuum, and that policy is needed to address both supplier and consumer needs and behaviors, this study takes into consideration some related demand and infrastructure policies.
Each country was given a traffic-light color-coding for policies in each of the eight policy categories. Subsequently, each country was assigned an overall color and a supply-side color. This can be seen in the color-coded map below.
The color coding serves as a tool to simplify comparison. But it is important to understand that there are many nuances, exceptions, and vehicle segments with less stringent policies. Policy implementation is also significant, though it is difficult to measure implementation effectiveness. The policy gap analysis is comparative and assesses policies on how they specifically can and have supported ZEV adoption across regions.
RMI grouped the countries and regions analyzed into three categories depending on their level of supply-side policy support for the ZEV market, as illustrated in the map below. Key takeaways include:
- China and the EU stand out because their national-level policies directly promote the sale of ZEVs or work to gradually replace internal combustion engine (ICE) vehicles with ZEVs by a specific date. The United States has strong supply-side policies, including the 45X Advanced Manufacturing Production Incentive. ACC II is also a ZEV sales requirement in certain states.
- Australia and India have some supply-side policies to support their domestic ZEV markets but could develop these policies more.
- Brazil, Indonesia, and South Africa have minimal supply-side policies in place. Brazil specifically faces challenges presented by the strong agriculture lobby, which supports a biofuel approach.
The table below highlights findings regarding standout supply-side policies that are shaping ZEV market advancement in these regions.
RMI’s research highlights the importance of taking both a granular and holistic view of global and local policy ecosystems and why it is crucial to consider countries’ specific history, geopolitical dynamics, domestic political climate, and larger policy frameworks.
Challenges faced in supply-side policy design and implementation
The country-level analysis also highlights challenges supply-side policies can face in design and implementation. It is important to understand these challenges both for regulatory and fiscal policies. RMI identified six categories of challenges supply-side policies may encounter. Not all challenges may be a risk in each market, and some may be perceived challenges, but it is crucial to be mindful of all challenges.
Political will also plays an essential role in the success of supply-side policies. Strong political will can drive progress and action, but a lack of political will, often influenced by industry actors, can lead to stagnation and delays in policy implementation.
Leveraging critical insights to progress ZEV policies
Supply-side policies have an important role to play in advancing the ZEV transition. When considering ZEV supply-side policies, decision makers should leverage global lessons learned and analyze trends to understand what policies have positively impacted other markets. While policies are not always transferable from one market to another, there are several key takeaways that can be leveraged and customized to enable local market growth.
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When designing supply-side policies, it is essential to consider the relevant context and the entire policy and implementation ecosystem. Policies should align with the market's development stage; early-phase markets have different needs than those ready for widespread adoption. A whole-systems approach, combining supply- and demand-side policies to meet both manufacturer and consumer needs, is essential for effective policy deployment.
The decisions we make today will influence how people and goods move for decades to come. Through the development of thoughtful supply-side policies, we can increase access to ZEVs and reduce transportation emissions and their harmful health effects, benefiting economies, the environment, and countless people around the world.
