Making affordable electric cars widely available

Isolated measures are not enough to ensure the rapid ramp-up of electric mobility; rather, a coherent overall package is needed. In addition to the vehicle price, charging costs play the biggest role in the overall cost of a car. In addition to economic considerations, comfort is also key to the purchase decision. The availability and features of vehicle models, as well as range and sufficient coverage with charging infrastructure and ease of use (e.g. in payment processing) play a central role here.

The promotion of fully electric vehicles can be an adequate means of meeting current challenges. The slow pace of electrification in road transport is making the achievement of climate targets in the transport sector a distant prospect and weakening the competitiveness of the German automotive industry. In addition, rising CO₂ prices will pose increasing challenges for households, especially where there are no alternatives such as public transport, cycling or walking. Appropriately designed subsidies for fully electric vehicles can help meet these challenges.

To enable affordable electric mobility, a key element of such a comprehensive package should be income-based subsidies for vehicle purchases. The move to take income into account represents a paradigm shift in the promotion of electric vehicles. The design must strike a balance between the targeting of the subsidy, administrative practicability and the realities of the German vehicle market, in particular the availability of affordable vehicle models.

Different variants of income-related subsidies have potentially different effects in terms of social, climate policy and industrial policy objectives, which must be carefully weighed up. The effects can be described in qualitative terms. Further qualitative and quantitative analyses of the extent of the expected effects and the likelihood of their occurrence are necessary and should be taken into account in the political negotiation process. This also applies to other possible criteria for limiting the subsidy, such as whether only people with cars should benefit from the subsidy or whether commuting distance or public transport availability are sensible additional criteria in terms of the objectives set.

Various instruments are available: direct purchase subsidies (‘purchase premiums’), different models for promoting leasing, and subsidies for vehicle loans. Each of these instruments has strengths and weaknesses and reaches different target groups. To reach many population groups through subsidies for vehicle purchases, it is necessary to implement a portfolio of instruments that work according to the same subsidy principles.

It makes sense to plan subsidies in stages from the outset, as the vehicle market is developing dynamically and the burden of high fuel prices on households is increasing. In the first stage, subsidies will be broader in scope to support the market for comparatively inexpensive vehicles and thus tap into new user groups at the same time. In the second stage, the focus will be on groups with special mobility requirements that are particularly affected by high CO₂ prices.

The subsidy limit for the price of new cars must be set at a level that is accessible to lower and middle income groups, while also being high enough to ensure that there are enough vehicles on the market that are suitable for everyday use by families. The subsidy should cover both young used cars (up to one year old) and older used cars. It makes sense to stagger the subsidy according to price and vehicle age.

An income-based subsidy is easy to implement, even if the current administrative structure and data situation in Germany present challenges and limitations. Both employment contracts and income tax assessment notices are currently acceptable as proof of income. The former is less bureaucratic to implement, but would limit the subsidy to employees. With regard to the requirements for the use of funds from the EU ETS 2 and the Social Climate Fund, work should begin as soon as possible on setting up an administrative infrastructure for socially graded subsidies to gain experience with this. It is essential that the subsidy application is reviewed before the vehicle is purchased to avoid households having to pay upfront and run the risk of the subsidy not being approved, which would jeopardise the entire financing.

The next step is to define the specific criteria and thresholds for the subsidy, as well as practical steps of application. This requires further analysis and careful consideration of the effects. Ideally, these should be developed on a scientific basis in a process that ensures a broad consensus among the various stakeholders.

Without a rapid ramp-up of electric cars, it will become increasingly unlikely that Germany will be able to achieve its climate targets by 2030 and maintain the competitiveness of its automotive industry. The ramp-up of electric mobility therefore needs to be significantly accelerated. Accordingly, a comprehensive package of measures is needed to make electric cars the preferred purchase option in the medium term. Particularly given the still high price differences between comparable electric and combustion engine models, there is still a need for purchase subsidies as part of a comprehensive package of measures.

As already mentioned, a key prerequisite for affordable electric mobility is the availability of affordable vehicles. This is the only way to make electric cars accessible to many sections of the population. There are currently few affordable models and cheap used cars on the market. In an initial stage, it therefore seems necessary to provide support that initially focuses on the market ramp-up of comparatively inexpensive vehicles.

At the same time, it makes sense to focus on people with low and middle incomes to give those who would otherwise be unable to afford the investment access to climate-friendly cars. This group has benefitted little from subsidies in the past and would be more severely affected by rising fuel prices due to the increasing price of CO₂.

It is assumed that from 2027, when EU-wide emissions trading in the transport sector begins, the price of CO₂ will continue to rise, further increasing the impact on those particularly affected. In a second step, these groups should therefore receive even more targeted support. This could be achieved by expanding the criteria, for example with regard to the availability of public transport or for certain occupational groups. The time until then can be used to prepare the introduction of such criteria and to define appropriate indicators and thresholds. Further differentiation of support amounts according to the degree of impact could also be considered, so that those who are not severely affected can continue to benefit from reduced support.

In preparation for the second stage, a pilot project could be funded under the Social Climate Fund, which will start in 2026, to test various criteria, such as the availability of public transport or shift work. This would allow experience to be gained on the accuracy of targeting, the implementation of various criteria and the necessary administrative structures. A regional pilot project can analyse whether vulnerable groups are successfully benefitting from the programme and what obstacles still exist. The experience and insights gained can be used to extend the subsidy to the whole of Germany in 2027 with the launch of the EU ETS 2.

In general, it makes sense to reduce the subsidy amounts over time. As electric mobility ramps up, electric cars will become cheaper and the price difference compared to combustion engines will decrease.

Stage 1: Promoting the mass market ramp-up of affordable electric cars 

The aim of the first funding stage is to bring more comparatively affordable cars onto the market and thus also enable cheaper used cars in the future. To achieve this, it is advisable to provide sufficient funding so that a significant number of cars can be subsidised. This can be financed from the revenue generated by the CO₂ price, the reduction of subsidies for fossil fuel alternatives or a special fund for the transformation of the automotive industry. Car manufacturers benefit from the sale of additional electric cars, as these contribute to achieving fleet limits and, if the fleet share exceeds 25 percent, increase the manufacturer-specific fleet limit.^[1] Manufacturers should therefore contribute to the financing, as they already do with the environmental bonus.

The aim in the first stage is to primarily reach people on middle incomes who cannot currently afford an electric vehicle unless it is provided as a company car. Due to the still very high vehicle prices and the low availability of affordable new and used cars, the purchase of an electric car is unlikely to be an option for households on very low incomes in the first stage. From 2026, the subsidy could be increased through additional funds from the Social Climate Fund so that electric cars also become affordable for these households. In the medium term, they will benefit from the vehicles coming onto the used car market and the general market upturn for cheaper vehicles.

Existing challenges to income-based subsidies can also be resolved in the short term, even if there is no ideal solution in the first instance (see Section 4.1). The advantages of being able to provide targeted support right from the start outweigh the methodological and practical hurdles and the additional administrative effort required for verification, as long as the process is designed to be simple enough.

The experience gained from the short-term introduction of a workable solution for income-related subsidies can then be used to improve the methodology and establish appropriate administrative systems. These can also be used in other sectors.

To provide the right incentives, an upper limit on the price of new vehicles is essential for the subsidy. As already envisaged in the environmental bonus, a gradual reduction in the price of new cars eligible for subsidies could send clear signals to the market.

Further analysis and careful consideration of the effects are necessary to determine appropriate thresholds for vehicle prices and income. Ideally, these should be developed on a scientific basis in a process that ensures broad consensus among the various stakeholders. Recommendations should also be developed regarding the challenges outlined in Chapter 4.1 with regard to income-related subsidies.

Stage 2: Needs-based subsidies to provide targeted relief for those particularly affected

In the second stage, subsidies could then focus more strongly on groups of people who are severely affected by rising fuel prices. This would create alternatives for those for whom the expansion of adequate public transport services is not possible in the short term and who will continue to rely on their own cars in the coming years. The eligibility criteria applied in the first stage could remain in place and, if necessary, be adjusted and supplemented by additional criteria that indicate the extent of the impact. In addition, consideration should be given to introducing criteria for the energy efficiency of vehicles.

From 2027, revenues from the EU ETS 2 will be available to finance purchase incentives, which must be earmarked for measures to promote the transformation of the transport and building sectors. However, the amount of these revenues is uncertain, as they depend not only on the design of the emissions trading system, but also on the behaviour of individual market players. Here, it may be useful to consider national measures that ensure a minimum price and thus predictable minimum revenues.

The availability of public transport plays a key role in meeting demand. This affects those who do not have a viable and affordable alternative to cars for everyday use. This is particularly relevant in rural areas, where the supply of essential goods and services often requires long journeys and where public transport services are inadequate. Another group of people particularly affected are those with special mobility requirements. Both criteria can be applied in combination and are not mutually exclusive.

^[1] European Union (2024)