Q&A: New Harris Economist Hyuk-soo Kwon Discusses EVs, Batteries, and Environmental Policy Trade-Offs

Hyuk-soo Kwon is an Assistant Professor at the Harris School of Public Policy. His research focuses on designing policies to correct issues that are harmful to the environment with an eye toward political realities and unintended economic consequences. He has a particular interest in the role of government incentives in the electric vehicle and battery industry.

Prior to joining Harris, Kwon was a Postdoctoral researcher at the Stanford Institute of Economic Policy Research. He earned his Ph.D. in Economics from Cornell University in 2023 and his MA and BA in economics from Seoul National University.

We had a chance to talk with him recently:

What about environmental policy interests you?

I am particularly interested in the design and comparison of environmental policies in the presence of multiple market failures, including unintended consequences of the policies themselves. These failures include market friction, asymmetric information, political constraints, and lack of competition, all of which can prevent markets from functioning efficiently.

Surprisingly, there are few academic papers addressing multiple market failures in environmental economics. Yet, these issues are crucial because they represent the real-world challenges policymakers face. For instance, one of my papers compares price-based policy instruments, such as subsidies and taxes, with quantity-based instruments, like the tradable electric vehicle credit system. Under this system, EV makers earn credits by selling EVs, which they can sell to conventional automakers who are required to accumulate enough credits to sell gasoline vehicles (GVs).

The policy comparison is set in the context of market power, where firms can influence the equilibrium credit price by leveraging their market power in the vehicle market. EV makers aim to raise the credit price for credit profits while GV makers try to lower it since it is a burden to them. In this context, can quantity-based instruments perform as effectively as price-based ones?

Additionally, I have earlier work that explores how to optimally design subsidy policies in the electric vehicle industry when both market power and externalities are at play.

Which countries are using quantity-based policies, and which are implementing price-based policies?

Both price- and quantity-based policies are widely used worldwide. For example, the three major EV markets—the U.S., Europe, and China—offer various financial incentives. Over ten U.S. states, as well as some Canadian provinces, have adopted tradable EV credit systems. China implements a dual-credit policy, and European countries are integrating their transportation sectors into emissions trading systems.

However, the timing of policy introduction is crucial. My study suggests that it’s better to introduce price-based instruments first, followed by quantity-based policies once the EV market has matured. Early on, when the EV industry was small, a handful of EV makers controlled the EV market. In addition, at that stage, EV and GV makers were clearly distinct, such as Tesla versus Volkswagen. As the EV industry matures, it becomes harder for a few EV makers to affect the credit price. Moreover, they do not have a strong incentive to do so because the division between EV and GV automakers is blurring. Many companies now produce both EVs and conventional vehicles. If one vehicle maker produces both GVs and EVs, changes in credit prices do not matter much to the firm because the change good for its EVs would harm its GVs, and vice versa.

Initially, most countries implemented EV subsidy policies, but now many are transitioning to tradable emissions credit systems, which aligns with the conclusions of my research. Most countries follow this trajectory, but the U.S. is an exception. California introduced a credit trading system first, and federal subsidies followed much later. This allowed Tesla to reap significant profits from credits in the early stages.

In your research on EV subsidy policies, what are the key lessons governments and policymakers can learn from these approaches?

My research offers theoretical insights into the optimal design of electric vehicle (EV) subsidies, including cross-country comparisons of various policy approaches. Countries have tackled these questions differently. For example, China bases its EV subsidies on driving range, the United States on battery size, South Korea on vehicle size, Japan on vehicle price, and Europe provides flat subsidies.

Given this diversity, I became interested in identifying the optimal way to design such subsidy policies. Governments typically manipulate two key factors: the base attributes (such as driving range or vehicle size) and subsidy intensity (how quickly subsidies scale based on these attributes).

These attribute-based subsidies not only affect product quantity, which relates to market power, but also incentivize product design changes. For instance, subsidies tied to driving range may encourage automakers to produce smaller, more energy-efficient vehicles, impacting environmental externalities.

My paper shows that in the absence of market power, governments can focus solely on product design and environmental concerns, as the market will naturally reach the optimal quantity. However, when automakers wield market power, production quantities fall below the optimal level. If governments intervene by pushing firms to design more socially optimal products (from an environmental or other standpoint), the resulting designs may be less attractive to consumers, worsening quantity distortions.

This creates an unfortunate cycle where improving a vehicle's social contribution per unit leads to lower overall production, complicating the total benefit to society. Therefore, it's essential to continue studying how to strike a balance between addressing both market power and externalities—ensuring that quantity and design considerations are harmonized.

How do policy interventions impact the global electric vehicle industry?

One of my papers examines the global EV battery industry, exploring how learning-by-doing has significantly reduced EV prices through substantial battery cost reductions. Learning in the battery industry magnifies the effects of EV subsidies, as increased EV sales—driven by the subsidies—lead to further cost reductions through learning. Additionally, learning-by-doing generates positive spillovers across countries through the battery supply chain. When two EV markets share the same battery suppliers, the enhanced learning of battery manufacturers due to subsidies in one country benefits other countries through lower battery costs.

However, preferential treatment for domestic battery manufacturers can hinder these spillovers. In the early stages of China’s EV industry, subsidies were limited to EVs using Chinese-made batteries, excluding Japanese and Korean battery makers. As a result, China is now home to some of the world’s largest battery companies. Although China has since removed such local protectionism, the U.S. Inflation Reduction Act (IRA) is adopting a similar approach. To qualify for subsidies in the U.S., EV makers must use batteries that meet specific content requirements: certain raw materials cannot be sourced from China, and the batteries must be assembled in the U.S.

My paper investigates how this trade dispute between the U.S. and China could influence the evolution of the global EV industry, considering the role of learning-by-doing.

What are you going to be teaching at Harris?

I'll be teaching Microeconomics II for MP students in the winter quarter.

What else should the Harris community know about you?

I like to golf–a lot. When I was a PhD student, I lived next to a golf course at Cornell. Then at Stanford, my house was also close to Stanford’s golf course. And now in Chicago I rent an apartment right above the golf course near Hyde Park. These aren’t coincidences. My goal is to become one of the best golf players among UChicago economics professors.