Phasing Out Green Subsidies: Evidence from the Sudden Stop of Federal EV Subsidies in Germany

Governments worldwide provide financial incentives to encourage consumers to adopt more sustainable technologies, such as electric vehicles (EVs). However, at some point, these subsidies should be phased out. The key question is: how can this be done without significantly dampening demand for these technologies? I examine the case of Germany, where, without prior notice, the federal government announced on December 16, 2023, that the Umweltbonus—a federal EV subsidy—would no longer apply to vehicles purchased starting December 17, 2023. To assess the impact of this abrupt subsidy withdrawal on EV sales, I constructed a panel dataset with monthly EV sales across all German Landkreise (counties). Using a regression discontinuity design, the results indicate that the removal of the Umweltbonus led to an immediate decline in EV sales of 65.5 cars per Landkreis, amounting to approximately 26,200 EVs nationwide. This represents a 36% drop in monthly EV sales compared to the pre-removal period. Exploratory analysis reveals that the decline in EV sales was notably smaller in counties with a high Green Party vote share, highlighting the role of environmental preferences in sustaining demand during the transition. Additional analysis is underway to explore the role of local county-level institutions in mitigating the negative effects of subsidy withdrawal.