Analyzing substitution effects between FCEVs and EVs in South Korea’s zero-emission market

Source abstract

The Korean government provides substantial subsidies to promote Fuel Cell Electric Vehicles (FCEVs) as part of its decarbonization strategy. This study examines consumer choice behavior and competitive market structure in Korean passenger car market through empirical analysis to understand the effectiveness of this subsidy-centric approach. Using nested logit model, we find that the cross-price elasticity between FCEVs and Internal Combustion Engine Vehicles (ICEVs) is near zero, indicating that FCEV subsidies primarily induce substitution from other Zero-Emission Vehicles (ZEVs), particularly Electric Vehicles (EVs). Policy simulations demonstrate that achieving a modest FCEV sales target requires substantial additional subsidies, yielding a negligible net increase in total ZEVs relative to the fiscal cost. Overall, our empirical findings suggest that standalone FCEV subsidies have limited effectiveness as a decarbonization instrument in the presence of strong market segmentation. These findings indicate that policies empirically reflecting consumer behavior could be more effective in achieving broader transportation sector decarbonization goals.