Assessing Impact and Cost Effectiveness of EV Subsidy (FAME-II)

We assess the environmental impact and cost effectiveness of the subsidy allocation in FAME-II scheme (Faster Adoption and Manufacture of Electric Vehicles). We argue that if the objective of FAME-II is to reduce vehicular emissions, higher subsidy allocation to three wheelers than buses is a cost effective strategy.

The FAME-II (Faster Adoption and Manufacture of Electric Vehicles) scheme plans to spend an overall sum of INR 10,000 crore over a period of 3 years. 86 percent of this is allocated for demand incentives to pure electric segments like electric buses, electric 3-wheelers (including e-rickshaw), electric 2-wheelers, and plug-in hybrid and strong hybrid segments in the 4-wheelers category.

We at TERI, conducted an analysis to determine the potential impact of the scheme and the cost effectiveness of allocating subsidy in reducing CO₂ emissions. Our results show an estimated savings of 67.79 million tonne of gross CO₂ from successful utilisation of the allocated demand incentives offered for EVs. Valuing this with India’s social cost of carbon (86 USD/tonne CO₂), it indicates carbon savings worth INR 40,530 crores from FAME-II. That is, for each rupee allocated as subsidy in FAME-II, there is an expected saving of INR 4.74 in terms of avoided CO₂ emissions. This indicates evidence of the environmental cost effectiveness of the scheme.

However, when the expected environmental benefits are segregated based on vehicle segments, 61 per cent of the CO₂ saved is attributed to expected adoption of e-3Ws, and just about 8 per cent is attributed to the adoption of e-buses. This is in sharp contrast with the segment wise allocation of the INR 10,000 crore fund. Electric buses were allocated 42 per cent of the fund, but amount to just 8 per cent of the expected environmental benefits from the entire scheme.

For each rupee allocated as subsidy to an electric bus, there is an expected saving of less than INR 0.80. This indicates that subsidy allotted for e-buses is not cost effective in terms of CO₂ emissions saved. Segment-wise cost effectiveness assessment revealed that, for each rupee spent on incentivising e-3Ws, there is carbon saving worth INR 9.96, which makes it a highly attractive vehicle segment to focus for EV adoption. However, INR 3545 crores in the FAME-II scheme is allocated to subsidising just 7090 e-buses, with each bus approximately getting a subsidy of INR 50 lakhs. This means that almost 100 e-3Ws can be incentivised for every e-Bus.

Electric buses, not being a cost-effective strategy in developing countries has been discussed earlier by the World Bank. Even though ICE buses may be more polluting than other modes on a per vehicle kilometre basis, they certainly are the least polluting vehicles when evaluated in terms of per passenger kilometre. Shifting people from cars to buses is the objective of many western transport policies. There have been ample studies citing inadequacy, inefficiency, and financial inoperability of bus systems in India. What our cities need is a lot more buses, rather than a handful of electric buses. Rather than increasing usage and availability of least polluting mode of transport (buses), we are spending crores of rupees to make the least polluting mode of transport even less polluting. Does this sound like a rational strategy?

We show that reallocation of FAME incentive to reduce allocation for electric buses and increasing electric three wheelers will have higher environmental impact, better visibility for EVs, as well as economic benefits for lakhs of autorickshaw drivers in India.