[celtain]

The government should tax/regulate things that have negative externalities, and the greater the externality, the harsher the restrictions should be.

Subsidizing smaller cars is a bad idea because they still have negative externalities, just less so. The government shouldn't be favoring driving a small car over walking, but that's exactly what a small (or electric) car subsidy does.

The reason we subsidize EVs instead of taxing gas-powered cars is because the latter is politically unpopular, not because the former is a better designed policy.