To achieve the national target of net-zero CO2 emissions by 2050, the UK will have to transition from fossil fuel cars to greener alternative fuel vehicles. However, despite electric vehicle sales increasing significantly over the past decade, their overall share in the market remains low. Filip Mandys and Shivani Taneja research the key factors affecting the demand for green rather than fossil fuel cars, finding that UK consumers are unwilling to pay a premium for electric vehicles.
According to the Department for Transport, the transport sector represents the largest emitter of greenhouse gas emissions in the UK. The sector alone accounted for about 26% of total emissions in 2021, with automobiles contributing significantly to this figure and thus to climate change. In the UK alone, the economic costs of climate change are expected to reach about 1.5% of GDP per year by 2045, even if the goals of the 2015 Paris Agreement are met.
As the UK has one of the largest car markets in the world (third in Europe, seventh in the world, in terms of sales), it is crucial for the market to transition to greener alternative fuel vehicles (AFVs). As a contribution to the goal of reaching net zero emissions by 2050, the UK government announced a ban on the sale of all new petrol and diesel cars by 2035. Over the past decade, several government policies have also aimed to speed up the switch to AFVs. A primary example was the Plug-in Car Grant, which reduced the cost of buying low-emission vehicles. The grant gave consumers a 25% discount on the purchase price of up to ₤5,000 if they met certain criteria. Similarly, consumers were also encouraged to switch to AFVs through a lower car tax (Vehicle Excise Duty). These policies have contributed to an eightfold increase in the sales of AFVs over the last decade, with the number of available car models growing from only two to 29 (Figure 1).
Despite this however, a complete transition to green vehicles may be easier said than done. For consumers, travelling by car has the advantage of privacy, comfort, and affordability, with automobiles also being a symbol of status for many. Buyers who are more conscious about their status may prefer large, conventional fossil fuel vehicles, over the greener options – sport utility vehicles (SUVs) accounted for about 60% of new car sales in 2023. Similarly, convenience-focused consumers may be dissuaded from purchasing AFVs due to the longer charging times, shorter range, and the limited charging network outside major cities. Even environmentally conscious consumers may choose cheaper hybrid cars with greater range, rather than fully electric vehicles, particularly as the Plug-in Car Grant policy ended in 2022. Consequently, an increasingly faster transition to electric vehicles may prove to be difficult to achieve.
In our latest research paper, “Demand for green and fossil fuel automobiles”, we examine how the drivers of demand differ between fossil fuel and clean vehicles, and whether UK consumers are willing to pay a premium to get a car that is better for the environment. The research focuses on the 2008–2019 period – a time which saw a rapid rise in AFV sales and ended just before the COVID-19 pandemic. During this period, UK cars experienced major improvements in quality, where even fossil fuel vehicles became considerably cleaner. The fuel consumption and CO2 emissions of the average car fell by about 15% and 20%, respectively. At the same time, engine power increased by 25%, showing that fossil fuel vehicles have not just become better for the environment, but also more powerful at the same time (Figure 2). This development can make it more challenging to persuade consumers to shift to fully electric vehicles, especially if this trend continues.
The drivers of automobile demand
In our research, we have identified three key car characteristics that drive the demand for automobiles in the UK car market:
- Fuel efficiency: UK buyers have a strong preference for cars that have lower fuel consumption, driven by both environmental concerns and potential economic gains. Vehicles with lower fuel consumption not only have the long-term environmental advantage of reduced greenhouse gas emissions, but also reward the consumer with savings on fuel costs.
- Vehicle size: Demand is considerably higher for compact vehicles without reduced seating capacity, showing growing demand for space-efficient cars. Such automobiles are especially useful in large, congested cities. This is particularly evident in the SUV market, where the majority of new SUV sales are small or smaller mid-size SUVs.
- Price: Unsurprisingly, price remains a major factor, with consumers preferring automobiles that are cheaper on average.
Upon analysing the demand drivers for fossil fuel cars and AFVs separately, we found that there is very little difference between the two. Consumers of both vehicle types tend to react similarly when there are changes in car characteristics. For example, a reduction in the maximum speed of a car by 10% decreases demand by about 15%, regardless of whether the car is a conventional vehicle or an AFV. This is true for most car characteristics in our research, including maximum range and price. The results suggest that these car characteristics are equally important to fossil fuel and green vehicle buyers. In other words, consumers are not willing to choose AFVs solely for their environmental advantage – the vehicle must be comparable to the competing conventional cars along the other dimensions.
With the low importance placed on AFV “greenness”, falling emissions of fossil fuel cars, and the end of the Plug-in Car Grant, consumers may need extra motivation to make a quicker transition to AFVs. In our research we also explored what impact potential new government AFV subsidies could bring. We found that an increase in UK automobile price of ₤1,000 reduces demand by about 3% for more expensive cars (e.g., BMW 3 Series, Tesla Model S), and by 5% for cheaper cars (e.g., Toyota Yaris, Renault Zoe). Once again, the fall in demand is similar for both conventional and green cars, confirming that consumers are not willing to pay any significant premium for the “greenness” of AFVs. Conventional vehicle buyers are, however, more likely to not buy any car after a price increase, compared to AFV buyers (i.e., leave the car market altogether). Consequently, we estimate that a subsidy of ₤1,000 would result in about 4.1% of consumers switching to AFV options, such as electric vehicles. In percentage terms, a 1% decrease in AFV price would increase demand for them by around 1.5%.
Policy implications
The low willingness of UK consumers to pay a price premium for cleaner automobiles means policy changes may be needed to speed up the switch to electric cars. Our findings point to the need either for subsidies for electric cars, or fossil fuel vehicle financial penalties. Without government support, the greater cost of AFVs and their lower convenience currently outweighs the environmental benefits in the eyes of the majority of buyers. UK consumers in general prefer cars that are physically smaller (even in the SUV market, smaller SUVs are preferred), lighter, and more fuel-efficient – aspects that AFV manufacturers can focus on. As we found that AFV buyers have about 40% greater preference for compact cars, targeted government policies should encourage the production and promotion of more compact, cost-effective AFVs, for example through tax benefits, consumer or manufacturer subsidies, and better urban design.
However, as AFV buyers are less likely to leave the car market altogether after a price increase, there is an opportunity for the government to motivate demand for them. Specifically, our results indicate that penalising the purchases of fossil fuel cars would be more effective than heavily incentivising green automobiles. Increasing the costs of conventional cars through car taxes is more likely to change consumer behaviour and speed up the diffusion of AFVs, rather than decreasing AFV costs through tax reductions or subsidies – especially if people are also informed about the long-term cost savings with electric cars.
Our research shows that investments into increasing electric vehicle range would have only a limited impact on boosting their sales. It may be more effective for investments and subsidies to go into expanding the fast-charging network in the UK, as the maximum range of standard electric vehicles is still substantially shorter compared to fossil fuel cars. However, the number of available charging points in the UK would have to rise significantly over the next decade – the Climate Change Committee suggests a twentyfold increase by 2032, along with electricity grid upgrades, to effectively support electric vehicle adoption. Still, a charging infrastructure that is efficient and dense would reduce the anxiety of consumers about electric vehicle range and increase the convenience of the technology.
Overcoming the price and range barriers, and speeding up the transition from fossil fuel to green automobiles, will require continuing policy interventions. This transition is one of the crucial steps to decarbonising the UK transport sector, moving to a more sustainable economy, and reaching the broader target of net zero CO2 emissions by 2050.
Read the research paper: Demand for Green and Fossil Fuel Automobiles
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
