EV subsidies pit economists against environmentalists

Prius Plug-In (Charged EVs)

Most of the world’s wealthy nations, as well as many state and local governments, offer some type of subsidy for buyers of plug-in vehicles, often in the form of a tax credit. At least a couple of studies have found that these subsidies are effective in terms of increasing EV sales and reducing emissions. But are they really the most efficient way to advance environmental goals?

In a recent blog post, economist James Bushnell of the Energy Institute at HAAS says that they are not, and offers three reasons:

  • The environmental benefits of EVs are real, but according to Bushnell’s analysis, are worth less than the subsidies paid for them.
  • Current subsidies are regressive, going primarily to upper-income taxpayers.
  • The environmental benefits of driving electric vary depending on regional factors. An EV in Washington State, which has a relatively clean electrical grid, displaces more emissions than one in West Virginia, where most of the electrons come from nasty coal. The US federal tax credit is the same regardless of a taxpayer’s location.

Bushnell says economists tend to believe current EV subsidies are excessive and inefficient, whereas “climate hawks” are all for them. The reason for this divide, he believes, is that the two groups approach the problem in two different ways.

Economists take a cost-based approach, in which the damage caused by a ton of carbon emissions must be weighed against the cost of eliminating a ton of emissions.

Makers of environmental policy tend to prefer a target-based approach, in which a certain level of emission reductions leads to achieving a certain temperature threshold (for example, in order to avoid a temperature increase of more than x degrees, we must reduce emissions by y percent).

It doesn’t take an economics degree to see that subsidizing EVs (or solar power, or any specific technology) is probably not the most systematic way to proceed if the goal is to reduce fossil fuel consumption. Who’s to say that driving an EV is better than insulating an attic, modernizing a power plant, or expanding a public transit system?

The best way to usher fossil fuels to the door would be a carbon tax, which would unleash the power of the free market, and allow producers and consumers to choose the most efficient ways to reduce carbon, taking into account all the complex factors that exist in different industries and different regions.

Most environmental thinkers understand this very well, but they also know that any policy that includes a new tax is probably a political non-starter. And not just in the US – voters around the world love tax breaks, and hate tax increases, and politicians are not unaware of these preferences. And that’s the real reason that subsidies are here to stay: they may be inefficient, but they’re better than nothing. Politics is, after all, the art of the possible.

Furthermore, as David Roberts points out in Vox, creating positive social change does not depend only on cost/benefit figures, but also on visible symbols that capture people’s imagination. Sending men to the Moon may not have been the most efficient way of inventing Teflon and Tang, but it inspired a generation to dream of scientific advances.

EVs are the most powerful symbols of our clean-energy future. They command people’s attention, and demonstrate that eliminating petroleum doesn’t mean sacrificing style, speed or convenience. Installing a scrubber at a coal power plant might save more emissions than driving a Model S, but which is more likely to inspire a young person to pursue a green career?


Source: Energy Institute at Haas via Vox