A newly released supply chain study published online ahead of print in Logistics Technology examines how government production subsidies and recycling subsidies affect operational decisions, profits, and social welfare in the electric vehicle battery supply chain. The research develops a Stackelberg game model involving a power battery supplier, an electric vehicle manufacturer, a third-party power battery recycler, and consumers. It compares three subsidy scenarios: a production subsidy based on electric vehicle demand, a recycling subsidy based on the quantity of used batteries recycled, and a recycling subsidy based on the recycled battery capacity. The study finds that production subsidies are more favorable for battery capacity, electric vehicle demand, supplier profits, and manufacturer profits, while recycling subsidies are more favorable for recycling effort, recycling prices, recycling volumes, and the profits of third-party recyclers. Under the modeled conditions, a positive production subsidy can raise social welfare above the levels associated with the two recycling subsidy scenarios, while a negative production subsidy, effectively a tax, can reduce social welfare below those recycling subsidy cases.
1. Electric Vehicle Growth Turns Battery Recycling into a Strategic Supply Chain Issue
The rapid expansion of the electric vehicle industry has made power battery recycling an increasingly urgent economic and environmental question. As electric vehicle ownership rises, more power batteries are entering retirement. The study notes that power batteries typically have an average service life of only five to eight years, and once capacity falls below a certain proportion of the original level, safety risks can increase, including insufficient braking and battery combustion. Large-scale, hard-to-assess retired batteries create significant challenges for electric vehicle manufacturers and recyclers. If retired electric vehicle batteries are not handled effectively, they can cause serious environmental pollution. At the same time, used electric vehicle batteries still contain residual energy and valuable materials, so failing to recycle them also wastes resources.
The research situates this problem within the broader development of the electric vehicle supply chain. It notes that electric vehicle manufacturers have been increasing research, development, and mass production to reduce reliance on fossil fuels and to achieve energy savings and emissions reductions. At the same time, the growth of the electric vehicle market has exposed the need for better tracking of battery performance and improved recyclability. The study argues that government subsidies can play an important role in improving recycling rates, especially because the current recycling rate for retired electric vehicle power batteries remains low and recycling processes face multiple challenges. Local policies have already begun to experiment with different subsidy designs. For example, some local governments have offered subsidies linked to the number of electric vehicle battery packs recycled, while others have offered rewards linked to the recycled battery capacity. These policy experiments provide practical motivation for comparing different subsidy instruments in the electric vehicle battery supply chain.
The study also emphasizes the importance of traceability and lifecycle information systems for electric vehicle batteries. It notes that some companies have developed full-lifecycle information systems that allow enterprises to upload data on battery recycling, dismantling, warehousing, and echelon utilization, and to connect with national traceability platforms. Such systems help make the source and destination of electric vehicle batteries traceable and controllable. However, traceability alone does not solve the economic incentives facing suppliers, manufacturers, and recyclers. The central question is how different subsidy instruments alter the decisions of electric vehicle supply chain members and how those decisions affect consumer demand, recycling performance, and social welfare.
2. Three Subsidy Scenarios in the Electric Vehicle Battery Supply Chain
The study models an electric vehicle battery supply chain composed of a power battery supplier, an electric vehicle manufacturer, a third-party power battery recycler, and consumers. The third-party recycler collects used electric vehicle power batteries and delivers them to the battery supplier, which uses them in the production of new power batteries. The supplier then sells new power batteries to the electric vehicle manufacturer, which produces electric vehicles and sells them to consumers. The government does not directly participate in the firms’ pricing or operational decisions. Instead, subsidy parameters are treated as exogenous variables. Social welfare is defined as the sum of total supply chain profit and consumer surplus, minus government subsidy expenditure.
The demand function for electric vehicles is modeled as dependent on the potential market size, retail price sensitivity, and consumer preference for battery capacity. The recycling quantity of used electric vehicle batteries depends on the free collection volume, the recycling fee, and recycling effort. Battery capacity research and development costs are modeled as a quadratic cost function, and recycling effort costs are also modeled as a quadratic cost function. The supplier’s buyback cost for used electric vehicle batteries is treated as exogenous and is assumed to be higher than the recycler’s recycling fee, ensuring that recycling is economically motivated. The game sequence is as follows: the battery supplier first sets the wholesale price and battery capacity; the electric vehicle manufacturer then sets the retail price; finally, the third-party recycler sets the recycling effort level and the used battery recycling fee.
The study compares three subsidy scenarios. These scenarios are summarized in the table below. The table is designed to show how each subsidy instrument targets a different part of the electric vehicle battery supply chain and how each instrument is associated with different operational and profit outcomes.
| Subsidy scenario | Subsidy base | Primary recipient | Immediate operational focus | Main profit effect | Social welfare insight |
|---|---|---|---|---|---|
| Production subsidy for electric vehicle demand | Per unit of electric vehicle demand | Power battery supplier | Battery capacity, electric vehicle demand, wholesale and retail pricing | Benefits the supplier and the electric vehicle manufacturer | A positive production subsidy can raise social welfare above the two recycling subsidy cases under the modeled conditions |
| Recycling subsidy based on recycled quantity | Per unit of used electric vehicle battery recycled | Third-party power battery recycler | Recycling effort, recycling fee, and recycling volume | Benefits the third-party recycler | Improves recycling activity but may not outperform a positive production subsidy in social welfare |
| Recycling subsidy based on recycled battery capacity | Per unit of recycled electric vehicle battery capacity | Third-party power battery recycler | Recycling effort, recycling fee, and capacity-oriented recycling | Benefits the third-party recycler | Improves recycling activity, with relative performance depending on subsidy levels |
The model yields equilibrium decisions for wholesale price, battery capacity, retail price, recycling effort, and the recycler’s used battery recycling fee under each scenario. It also yields equilibrium demand, recycling quantity, supplier profit, manufacturer profit, third-party recycler profit, consumer surplus, government subsidy expenditure, and social welfare. The study uses backward induction to solve the game and compares the equilibrium outcomes across the three subsidy scenarios. The analysis assumes that the Hessian matrix is negative definite and that a unique equilibrium exists when specific parameter conditions hold. It also imposes non-negativity conditions on equilibrium decisions and profits so that the comparisons remain economically meaningful.
3. How Subsidies Affect Electric Vehicle Battery Capacity, Demand, and Recycling
The study reports several central findings on electric vehicle battery capacity, electric vehicle demand, and recycling behavior. These findings are presented below in a unified numbered structure.
- Battery capacity research and development costs trade off against consumer preference for electric vehicle battery capacity. In every subsidy scenario, a higher battery capacity research and development cost coefficient reduces electric vehicle demand and manufacturer profit. A lower consumer preference for battery capacity also reduces electric vehicle demand and manufacturer profit. Conversely, a stronger consumer preference for battery capacity increases demand and manufacturer profit. The study explains that high battery capacity implies high research and development costs, which increase the production cost per electric vehicle and compress marginal profit. Therefore, the electric vehicle manufacturer must balance the negative effect of high battery research and development costs against the positive effect of larger battery capacity and stronger consumer preference. The managerial implication is that electric vehicle manufacturers should seek technology upgrades or production scale improvements that increase battery capacity while reducing research and development costs, thereby maintaining competitiveness in the electric vehicle market.
- Recycling volume and third-party recycler profit respond positively to free collection volume and recycling effort sensitivity. In all three subsidy scenarios, the recycling quantity of used electric vehicle batteries and the third-party recycler’s profit are positively related to the free collection volume and the sensitivity of recycling quantity to recycling effort. The study explains that a larger free collection volume lowers the recycler’s operating cost, while subsidies provide economic incentives for the recycler to collect more used electric vehicle batteries. However, the relationship between recycling volume and the recycling fee sensitivity is positive only when the recycling fee sensitivity is sufficiently large. When the recycling fee sensitivity is large, the recycler pays closer attention to controlling recycling costs and balancing cost control against recycling volume expansion. The managerial implication is that third-party recyclers should optimize recycling processes, improve recycling efficiency, and strengthen environmental communication to reduce unit recycling costs.
- Production subsidies increase battery capacity more than recycling subsidies do. The study finds that battery capacity under the production subsidy scenario is higher than battery capacity under either recycling subsidy scenario. This is described as a counterintuitive result because recycling subsidies might be expected to indirectly promote battery capacity research and development by improving recycling returns. The study explains that production subsidies lower product prices and raise consumer purchasing power, especially for economically sensitive consumer groups. Production subsidies can also increase consumer confidence in electric vehicles because consumers see that the government is supporting the electric vehicle industry. With higher potential demand, the supplier and manufacturer can convert sufficient profits into battery research and development investment, thereby increasing battery capacity. By contrast, recycling subsidies mainly have a direct positive effect on the third-party recycler and have a limited indirect effect on supplier and manufacturer profits. The managerial implication is that electric vehicle manufacturers should continue to innovate and invest in research and development, while governments should design reasonable subsidy mechanisms with clear subsidy amounts, targets, and durations.
- Recycling subsidies increase recycling effort and recycling prices. The study finds that recycling effort and the recycler’s used battery recycling price are lower under the production subsidy scenario than under either recycling subsidy scenario. In other words, recycling subsidies are more effective at stimulating recycling effort and raising the recycling price. The relative size of recycling decisions under the two recycling subsidy scenarios depends on the relationship between the per-unit recycling quantity subsidy and the per-unit recycled battery capacity subsidy. If the per-unit recycling quantity subsidy is larger or the per-unit recycled battery capacity subsidy is smaller, the recycling price under the recycling quantity subsidy scenario is higher. The study explains that when the subsidy is based on recycled quantity, the recycler has a stronger incentive to increase recycling volume to obtain more subsidy. When the subsidy is based on recycled battery capacity, the recycler pays more attention to the capacity of the recycled batteries rather than merely the recycling volume. The managerial implication is that governments should choose subsidy targets and subsidy amounts carefully and establish performance evaluation mechanisms to monitor and adjust recycling subsidy policies.
- Production subsidies increase electric vehicle demand and upstream profits. The study finds that electric vehicle demand, manufacturer profit, and supplier profit are higher under the production subsidy scenario than under the two recycling subsidy scenarios. Production subsidies reduce the production costs faced by the supplier and manufacturer, strengthen their competitive advantage, and encourage them to expand production scale, creating economies of scale. The study also finds that recycling subsidies increase recycling quantity and third-party recycler profit relative to the production subsidy scenario. Recycling subsidies act as an incentive mechanism that encourages individuals and third-party recyclers to participate more actively in recycling, reducing resource waste and supporting reuse and recycling objectives. The relative size of recycling quantity under the two recycling subsidy scenarios again depends on the relationship between the recycling quantity subsidy and the recycled battery capacity subsidy. The managerial implication is that firms should monitor government policy changes and seek production or recycling subsidies to improve their production or recycling incentives and maximize their profits. For governments, both production and recycling subsidies can help create potential demand and promote economic growth and sustainable development, but subsidy design and allocation should be transparent and fair to prevent improper competition and resource waste.
4. Social Welfare Effects and Policy Simulation for Electric Vehicle Battery Subsidies
The study further examines social welfare because the three subsidy forms do not affect all supply chain members in the same way. Social welfare is defined as the sum of total supply chain profit and consumer surplus minus government subsidy expenditure. The study uses numerical simulation to compare social welfare across the three subsidy scenarios. The simulation considers a production subsidy range that includes a negative value, a zero value, and a positive value, representing taxation, no government participation, and subsidization, respectively. It also considers a range of retail price sensitivity coefficients. The purpose is to verify the analytical findings and to explore whether new results emerge when production subsidies are allowed to be negative, zero, or positive.
The simulation finds that as the price sensitivity coefficient increases, social welfare declines in all three subsidy scenarios. The study explains that a larger price sensitivity coefficient means consumers are more sensitive to the retail price and can only accept relatively low prices. This can lead to supply-demand imbalances and market failures, such as market monopoly or excessive competition. It can also increase price volatility and demand uncertainty, making it difficult for firms to make long-term plans and affecting production decisions. Consumer purchasing decisions may also fluctuate, and the combined effect can reduce social welfare.
The simulation also finds that when the production subsidy is negative, meaning that a tax is imposed, the government may theoretically obtain more revenue, but social welfare declines significantly. The study describes this as a counterintuitive result. The explanation is that taxation raises the operating costs of firms, causing them to contract production scale or raise prices to compensate for the tax burden. As a result, social welfare falls. When the tax is removed and a positive production subsidy is introduced, social welfare under the production subsidy scenario gradually increases and becomes higher than social welfare under the recycling quantity subsidy scenario and the recycled battery capacity subsidy scenario. The study explains that production subsidies can lower product prices, increase consumer purchasing power, and raise effective market demand. This helps improve resource utilization efficiency, producer income, and consumer utility, thereby raising social welfare. For the electric vehicle supply chain and the government, the study concludes that under the modeled conditions, a positive subsidy is a better equilibrium choice than taxation.
| Outcome compared | Production subsidy scenario | Recycling quantity subsidy scenario | Recycled battery capacity subsidy scenario |
|---|---|---|---|
| Electric vehicle battery capacity | Higher than both recycling subsidy scenarios | Equal to the recycled battery capacity subsidy scenario | Equal to the recycling quantity subsidy scenario |
| Electric vehicle demand | Higher than both recycling subsidy scenarios | Equal to the recycled battery capacity subsidy scenario | Equal to the recycling quantity subsidy scenario |
| Manufacturer profit | Higher than both recycling subsidy scenarios | Equal to the recycled battery capacity subsidy scenario | Equal to the recycling quantity subsidy scenario |
| Supplier profit | Higher than the maximum of the two recycling subsidy scenarios | Lower than the production subsidy scenario | Lower than the production subsidy scenario |
| Third-party recycler profit | Lower than both recycling subsidy scenarios | Higher than the production subsidy scenario | Higher than the production subsidy scenario |
| Recycling effort and recycling price | Lower than both recycling subsidy scenarios | Higher than the production subsidy scenario | Higher than the production subsidy scenario |
| Recycling quantity | Lower than both recycling subsidy scenarios | Higher than the production subsidy scenario | Higher than the production subsidy scenario |
| Social welfare | A positive production subsidy can exceed both recycling subsidy scenarios under the modeled conditions; a negative production subsidy can fall below them | Depends on subsidy levels and price sensitivity | Depends on subsidy levels and price sensitivity |
5. Extended Models: Electric Vehicle Supply Chain Leadership and Vertical Integration
The study extends the basic model in two directions. The first extension changes the game sequence so that the electric vehicle manufacturer acts as the leader of the supply chain. The second extension considers a scenario in which the manufacturer merges with the battery supplier and pays a merger fee, forming a centralized system. These extensions are intended to capture possible future scenarios in the electric vehicle battery supply chain.
In the manufacturer-as-leader extension, the study assumes no government subsidy. The electric vehicle manufacturer first sets the marginal profit of the electric vehicle, and the retail price is equal to the marginal profit plus the wholesale price. The battery supplier then sets the wholesale price and battery capacity. Finally, the third-party recycler sets recycling effort and the used battery recycling fee. The study finds that the manufacturer’s profit is higher when it acts as the leader than in the basic model. The study describes this as a “who holds leadership, who gains advantage” result. In addition, when the consumer preference for battery capacity is sufficiently high and profitable, the manufacturer can lead the entire supply chain in a way that increases its own profit, the supplier’s profit, and social welfare. The managerial implication is that electric vehicle firms should pay close attention to leadership and consumer preference and should prioritize battery capacity improvement as a key path to profit growth and social welfare improvement.
In the merger extension, the study assumes no government subsidy and considers a centralized supply chain in which the manufacturer merges with the supplier. The study finds that the centralized system outperforms the decentralized supply chain only when the merger fee is below a certain threshold. When the merger fee equals the threshold, the manufacturer is indifferent between centralization and decentralization in terms of total supply chain profit. The managerial implication is that electric vehicle firms should evaluate merger costs and ensure that those costs remain below the efficiency threshold before pursuing vertical integration. Otherwise, excessive investment in integration may reduce profits rather than improve them.
6. Implications for Electric Vehicle Manufacturers, Recyclers, and Policymakers
The study offers several implications for decision-makers in the electric vehicle battery supply chain. These implications are summarized below in a unified list.
- Electric vehicle manufacturers should balance battery capacity and research and development costs. The study shows that higher battery capacity research and development costs reduce electric vehicle demand and manufacturer profit, while stronger consumer preference for battery capacity increases demand and profit. Electric vehicle manufacturers should therefore pursue technology upgrades and production scale improvements that raise battery capacity while reducing research and development costs. This is important for maintaining competitiveness in the electric vehicle market and for responding to consumer preferences for higher-capacity batteries.
- Third-party recyclers should use recycling subsidies to improve collection and processing efficiency. In the short term, recycling subsidies can directly or indirectly motivate third-party recyclers to engage in recycling activities. In the long term, subsidies can encourage recyclers to expand recycling scale and reduce costs in collection, sorting, and processing. Third-party recyclers should optimize recycling processes, improve recycling efficiency, and strengthen environmental communication to lower unit recycling costs and improve recycling performance in the electric vehicle battery supply chain.
- Governments should design transparent and performance-oriented subsidy mechanisms. The study suggests that governments should design reasonable subsidy mechanisms, including clear subsidy amounts, subsidy targets, and subsidy durations. Governments should also establish effective performance evaluation mechanisms to monitor and evaluate the implementation of recycling subsidy policies and adjust policies in a timely manner. For electric vehicle battery recycling, governments may consider supporting consumer demand for high-capacity electric vehicle batteries through purchase subsidies or preferential policies, while also promoting recycling quantity and recycler motivation through recycling subsidies.
- Production subsidies can support electric vehicle demand and upstream profits, while recycling subsidies can support recycling activity. The study finds that production subsidies favor battery capacity, electric vehicle demand, supplier profits, and manufacturer profits, while recycling subsidies favor recycling effort, recycling prices, recycling quantity, and third-party recycler profits. Policymakers should recognize these different effects and choose subsidy instruments that align with specific policy goals. If the goal is to expand electric vehicle demand and support battery capacity development, production subsidies may be more effective. If the goal is to increase recycling activity and support third-party recyclers, recycling subsidies may be more effective.
- Supply chain leadership and vertical integration should be evaluated carefully. The manufacturer-as-leader extension shows that leadership can benefit the electric vehicle manufacturer and, under certain conditions, can also improve supplier profit and social welfare. The merger extension shows that vertical integration can outperform a decentralized supply chain only when the merger fee is below a threshold. Electric vehicle firms should therefore evaluate leadership strategies and merger costs carefully before making organizational changes in the battery supply chain.
7. Limitations and Future Research on Electric Vehicle Battery Subsidies
The study acknowledges several limitations. Although government production or recycling subsidies can play a positive role in promoting electric vehicle development, they may also induce fraudulent subsidy claims. Therefore, multiple policy measures may be needed, such as taxation of firms or subsidies to consumers. In addition, the electric vehicle supply chain has many participants, and electric vehicle brands differ widely. The parameter values used in the mathematical analysis may not be fully accurate, and further data collection and analysis are needed. The study suggests that future research could use additional business data analysis to improve parameter estimation and to examine more complex electric vehicle battery supply chain scenarios.
Overall, the study provides a systematic comparison of production subsidies and recycling subsidies in the electric vehicle battery supply chain. It shows that subsidy design is not a one-size-fits-all policy problem. Production subsidies can strengthen battery capacity, electric vehicle demand, and upstream profits, while recycling subsidies can strengthen recycling effort, recycling prices, recycling quantity, and recycler profits. The social welfare effects depend on the subsidy level and market conditions. Under the modeled conditions, a positive production subsidy can raise social welfare above the two recycling subsidy cases, while a negative production subsidy can reduce social welfare below them. These findings offer important references for electric vehicle manufacturers, third-party battery recyclers, and governments as they make operational and policy decisions in the rapidly evolving electric vehicle industry.