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Optimal Switch from a Fossil-Fueled to an Electric Vehicle

Paolo Falbo, Giorgio Ferrari, Giorgio Rizzini and Maren Diane Schmeck
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Paolo Falbo: Center for Mathematical Economics, Bielefeld University
Giorgio Ferrari: Center for Mathematical Economics, Bielefeld University
Giorgio Rizzini: Center for Mathematical Economics, Bielefeld University
Maren Diane Schmeck: Center for Mathematical Economics, Bielefeld University

No 642, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University

Abstract: In this paper we propose and solve a real options model for the optimal adoption of an electric vehicle. A policymaker promotes the abeyance of a fossil-fueled vehicles through an incentive, and the representative fossil-fueled vehicle's owner decides the time at which buying an electric vehicle, while minimizing a certain expected cost. This involves a combination of various types of costs: the stochastic opportunity cost of driving one distance with a traditional fossil-fueled vehicle instead of an electric one, the cost associated to traffic bans, and the net purchase cost. After determining the optimal switching time and the minimal cost function for a general diffusive opportunity cost, we specialize to the case of a mean-reverting process. In such a setting, we provide a model calibration on real data from Italy, and we study the dependency of the optimal switching time with repect to the model's parameters. Moreover, we study the effect of traffic bans and incentive on the epected optimal switching time. We observe that incentive and traffic bans on fossil-fueled transport can be used as effective tools in the hand of the policymaker to encourage the adoption of electric vehicles, and hence to reduce air pollution.

Keywords: electric vehicle adoption; real options; stochastic opportunity cost; pollution; incentives; optimal stopping (search for similar items in EconPapers)
Pages: 26
Date: 2021-01-11
New Economics Papers: this item is included in nep-ger
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https://pub.uni-bielefeld.de/download/2949956/2949957 First Version, 2020 (application/pdf)

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