FIGURE 8.1 Illustrative example of a price-based policy approach, indicating the per-vehicle subsidy from government for each fuel cell vehicle sold in a particular year for the Hydrogen Success (Case 1) scenario.

One way to reduce the uncertainty over future penetration rates is to use a discretionary policy whereby subsidy levels or tax credits are adjusted upward or downward, according to whether future penetration rates turn out to be below or above target levels. In other words, the policy is adjusted to try and keep the net-of-subsidy life-cycle costs of hydrogen vehicles below (perhaps well below) those for comparable gasoline vehicles in any given year. However, this can be problematic in several respects. In particular, it may make more sense to adjust the penetration targets—for example, make them less ambitious, or possibly even abandon them altogether, if hydrogen technology evolves at a rate slower than that for others, such as biofuels or electric vehicles. It also creates an uncertain environment for investment decisions if firms do not know when, or by how much, future subsidies might be revised, and it may even have perverse effects if firms anticipate that their progress on vehicle development may cause future subsidies to be cut. A possible compromise might be to allow some very limited flexibility, for example, a midterm review of progress with a once-and-for-all correction in the subsidy schedule, based on criteria clearly specified in the initial legislation.

Quantity-based Approach (Quotas)

In contrast to the price-based approach, a quantity-based approach would impose a rigid sales share quota, such as illustrated in Figure 8.2 (which also corresponds to the Hydrogen Success scenario in Chapter 6). This approach might be more appealing to policy makers because it achieves a given hydrogen penetration target with far more certainty. Here, manufacturers must sell hydrogen vehicles through their own vehicle pricing strategies, regardless of market conditions and competition from other types of vehicles. The quota might be accompanied by a subsidy to manufacturers to assist them in getting through the very expensive transition, but the driving force would still be the quota. As suggested by the two figures, either approach can achieve the same results. The main drawback of this approach is that there is no limit on the costs of the policy, which could be especially burdensome if technological advance is slower than for competitor vehicles and hydrogen vehicles remain relatively costly to produce. In contrast, a (fixed) subsidy under the price-based approach is more flexible because it provides a natural mechanism for capping program costs, as manufacturers are free to scale back any plans for new vehicle production if future market conditions do not favor hydrogen vehicles. Imposing a uniform, minimum sales share quota across different manufacturers can also be problematic if it is relatively easy for some firms to meet the quota (for example, firms that are further ahead on the learning curve) and relatively costly for others. Again, this is not an issue under the subsidy policy since low-cost hydrogen vehicle producers will take more advantage of the subsidy by selling more vehicles, while high-cost producers will sell fewer vehicles and forgo the subsidy. However, the problem

FIGURE 8.2 Illustrative example of a quantity-based policy approach, indicating the required fraction (quota) of all new vehicles sold in a particular year that must be fuel cell vehicles for the Hydrogen Success (Case 1) scenario.

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