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Subsidy-Powered Vehicles

Monday, August 13, 2012

Even with modern technology, electric cars are not capable of satisfying consumer desires. Policymakers should end their wasteful counter-market pursuit of vehicle electrification.

Environmentalists have long wished for the electrification of passenger vehicles. As Professor Vaclav Smil points out in Energy Myths and Realities, both Thomas Edison and Henry Ford labored mightily to make that happen:

Few people believed more strongly in the eventual dominance of electric cars than Thomas Edison, the inventor of the modern electric system. This conviction brought about one of the most consequential partings in the history of technology. Henry Ford was hired as the chief engineer at Detroit Edison Illuminating Company.

Edison would, in fact, spend more than ten years trying to develop a battery that could compete with a gasoline engine. Alas, he didn’t find one. That did not dampen enthusiasm for electric cars, however.

As Robert Bryce points out in Power Hungry, “All-electric cars are The Next Big Thing. And they always will be.” Bryce goes on to chronicle the 100+ year search for the all-electric car that can compete on a level playing field with internal-combustion engines, and finds a long history of failure. A few examples of the false starts that litter the history of electric cars are illustrative:

•    1911: The New York Times declares that the electric car “has long been recognized as the ideal solution” because it “is cleaner and quieter” and “much more economical.”

•    1915: The Washington Post writes that “prices on electric cars will continue to drop until they are within reach of the average family.”

•    1979: The Washington Post reports that General Motors (GM) has found “a breakthrough in batteries” that “now makes electric cars commercially practical.” The new zinc-nickel oxide batteries will provide the “100-mile range that General Motors executives believe is necessary to successfully sell electric vehicles to the public.”

The long history of failure involving electric cars has never dimmed the enthusiasm of environmental regulators, however, particularly in California, which mandated the statewide adoption of all-electric cars back in 1990. The state’s “Zero Emission Vehicle” mandate, enacted in 1990, required that by 1998, 2 percent of the vehicles sold in the state by large automakers had to be zero-emission (a.k.a. electric) vehicles. That mandate was set to increase to 5 percent of vehicle sales by 2001 and 10 percent by 2003. It was ostensibly a performance standard, but the only vehicles that could satisfy it were all-electric cars. California later relaxed its standards, as automakers had not been able to meet them.

The limitations of electric vehicle technology

Alas, electric vehicle technology is still unable to satisfy the demands of consumers. Consider the Chevy Volt. When it was first announced, the price estimate from GM was $30,000. That soon jumped to $35,000. The actual sales price for the Volt, at the time of this writing, is just under $40,000. The all-electric Nissan Leaf, with a limited range of about 73 miles per charge, sells for about $35,000. By comparison, Chevy’s similarly-sized, gas-powered Cruze Eco starts at $16,800, and Nissan’s comparable Versa Hatchback begins at a similarly low price of $18,590. In other words, these gas-powered equivalents retail for nearly half the sticker price of their electric counterparts. When you consider this fact, it’s unsurprising that Chevy sold over 200,000 Cruzes in 2011, but fewer than 8,000 Volts.

Hybrids are also more expensive to insure. Online insurance broker shows that it costs $1,308 to insure a Honda Civic but $1,486 to insure a Honda Civic Hybrid. Similarly, it costs $1,517 to insure a Toyota Camry Hybrid but only $1,276 to insure a Toyota Camry, $1,602 to insure a Chevrolet Volt but only $1,351 for the Chevrolet Cruze, and $1,512 for the Nissan Leaf but only $1,240 for the comparable Nissan Versa.

green ins premiums

What explains the higher rates? According to the Mitchell Industry Trends Report, hybrids cost more to insure because their parts are more expensive and repairing them requires specialized labor, thus boosting the after-accident payout. Even conventional small cars are more expensive to insure than larger vehicles, because the former are involved in more accidents that produce extensive injuries. According to a recent article in The Wall Street Journal, the same driver would pay $412 more to insure a Honda Civic compact that gets 36 mpg on the highway than he would to insure a Honda CR-V (Honda’s mini-SUV) that gets 27 mpg.

As mentioned above, sales of environmentally-friendly vehicles are lackluster, to say the least. The figure below shows the volume of sales of the GM Volt and Nissan Leaf in perspective:


Enter the subsidies

In order to promote sales of electric or partially electric vehicles (PEVs), federal and state subsidies have flourished. At the federal level, a tax credit for plug-in electric vehicles was first enacted in the Energy Improvement and Extension Act of 2008, and was later modified in the American Recovery and Reinvestment Act (ARRA) of 2009. The current tax credit is available for plug-in electric vehicles purchased after December 31, 2009 that meet the following qualifications:

•    Draw propulsion using a traction battery

•    Have at least four kilowatt-hours (kwh) of capacity

•    Use an external source of energy to recharge the battery

•    Have a gross vehicle weight rating of up to 14,000 lbs

•    Meet specified emission standards

The credit is a minimum of $2,500 for 4 kwh capacity, and increases by $417 for a car with at least 5 kwh capacity, plus an additional $417 for every kilowatt-hour over five, where the portion of the credit determined by battery capacity cannot exceed $5,000. Therefore, the maximum credit is $7,500. ARRA also authorized federal tax credits for converted plug-ins, though the credit is lower than for new PEVs. The credit is 10 percent of the cost of converting a vehicle to a qualified plug-in electric vehicle, with a maximum credit of $2,500 applied to conversions made between February 17, 2009 and January 1, 2012.

States also have a vast array of monetary and non-monetary incentives and subsidies for advanced and unconventionally-fueled vehicles. There is a useful database of such incentives at the U.S. Department of Energy’s Alternative Fuels Data Center. For example, searching the database for incentives in say, Virginia, shows that the state allows alternatively-fueled vehicles to use High-Occupancy Vehicle lanes regardless of the number of passengers. Virginia also exempts drivers of many kinds of alternatively-fueled and electric vehicles from the Virginia emissions inspection program. Texas offers a variety of grants for buying or converting vehicles to run on alternative fuels, as well as grants for tax replacement and grants for building “clean vehicle” infrastructure.

Nationally, searching for incentives and regulations relating exclusively to electric vehicles, hybrid vehicles, and plug-in hybrid vehicles generates 384 results, an average of about eight per state—though, in actuality, there is considerable state-to-state variation as the table below demonstrates.

green_electric cars3


Subsidies make for poor policy

All of these subsidies make for poor public policy. Subsidies subvert the efficient functioning of the market, which is our only effective mechanism for matching supply with demand. Free trade of a given good is, as economics tells us, the only way to determine efficiently how much of that good is desirable at a given price.

Just as Soviet planners could not simply determine how many shoes of what sort people would want in five years’ time, politicians cannot determine how many kilowatt-hours Americans will want in five years, nor the price Americans will be able to pay without sacrificing wealth to inefficiency. The idea that politicians could make such predictions is, as Nobel Prize-winning economist Friedrich Hayek observed, the fatal conceit of government.

Subsidies subvert the efficient functioning of the market, which is our only effective mechanism for matching supply with demand.

Subsidies create a fertile garden for rent-seekers who connive to get a share of the pie by hook and often by crook. Rent-seeking happens when people who cannot sell a good in a free market tap the coercive and redistributionist force of government to lever their uncompetitive good into the market at the public’s expense.

Rather than contributing to overall social welfare by giving consumers the best goods at the lowest cost, rent-seekers undermine social welfare by foisting inferior or overpriced goods on the market while taking money that could be used for important purposes.

Subsidies create a vehicle for government manipulation by special interests and campaign donors at the general public’s expense. Does anyone really think that environmental groups and the wind and ethanol industries were unaware of the potential windfall a Democratic Congress would bring? Does anyone really think they did not donate to political campaigns accordingly?

Subsidies are often inequitable. High gasoline taxes create an incentive for new fuel-efficient cars—in a sense creating a subsidy for vehicles that get many miles to the gallon. But only people in higher economic brackets can afford new cars; poorer people are left to drive less efficient vehicles and spend more on gasoline taxes.

When the California government wanted to subsidize the last generation of electric vehicles, it offered more than $8,000 to people who leased GM’s EV1. But the only people who could do so belonged to households that earned more than $100,000 annually and had a regular petrol-powered car as their primary mode of transportation.

Finally, subsidies pave the way for the adverse consequences that inevitably result when legislators decide that their few hundred heads make wiser choices than the nearly infinite number of nuanced economic decisions made by their millions of constituents.

Environmental benefits are scant

If a customer is willing to bite the bullet of a more expensive car and higher insurance premiums, you’d think that he would at least be able to rest easy with the knowledge that his eco-friendly vehicle is helping the environment. However, it has been proven that increasing the number of plug-in or electric cars does not even necessarily equate to improved air quality. As researchers with Resources for the Future noted back in 2001:

California’s decision to mandate the sale of zero-emissions vehicles (ZEVs) as a means of improving air quality in the state looked like a clear victory for the environment. However, technology breakthroughs have proven elusive, resulting in ZEVs with high costs and poor performance. If the costs of producing ZEVs and subsidizing their purchase are spread across California’s new car market, consumers are likely to respond to the price increases by holding onto their older vehicles, which have much higher emissions rates. Even a small increase in their use will generate extra emissions that will more than offset emissions reductions from ZEVs.

The researchers explain further that:

The electric car requirement will slightly reduce emissions from the average new car sold in California. However, the program will also raise the prices of both electric and non-electric new cars sold in the state as companies seek to recover the costs of developing and producing electric vehicles and the subsidies needed to get consumers to buy them. It is the economic response of Californians to these higher prices that will turn CARB's [California Air Resources Board] good intentions into extra tons of emissions. Californians are likely to purchase fewer new cars and to continue driving their old cars longer. If the cost of producing electric cars, as estimated by CARB, is spread across the entire new car sales base in California, previous experience with the consumer response to higher new car prices suggests that total new car purchases will fall by 2 percent–3 percent, with an offsetting increase in the retention of older cars in the fleet. While the consumer response is small in terms of numbers of vehicles, the emissions impacts will be substantial, because old cars have much higher emission rates than new ones. Yet a recent CARB staff analysis, which suggests that the ZEV program will very modestly reduce emissions from the vehicle fleet, simply ignores this consumer response and its emissions implications. Once this response is properly taken into account, CARB’s own emissions models suggest that the emissions increase resulting from more intensive use of older cars will overwhelm the expected emissions reductions from new ZEVs.

If anything, this dynamic is even more likely today, as the regular vehicle fleet is far cleaner than it was in 2002, and, perversely, vehicle longevity has increased over time.

Furthermore, there’s the question of what energy you use to charge up the cars. As Vaclav Smil documents, using our current mix of standard technologies would require us to produce a great deal of additional electricity, which has its own emissions. Smil calculates that charging electric cars with the mix of energy we used in 2008 would:

…offer no primary energy savings and no carbon emissions advantage when compared to the alternatives of a highly efficient gasoline car fleet or the large-scale adoption of hybrid vehicles—unless, of course, all of the electricity consumed by the all-electric vehicles were [sic] generated by renewable conversions rather than by the current mix of generation relying on coal, natural gas, nuclear fission, and water power.

And while California policymakers no doubt believe that is how people will power their cars, Smil and others have doubts. As Benjamin Zycher explains in a monograph for the American Enterprise Institute, the renewable energy agenda, which is already faltering, is likely to encounter problems in the near future:

The market difficulties faced by renewables are likely to be exacerbated by ongoing supply and price developments in the market for natural gas, which will weaken further the competitive position of renewable power generation.

Let’s learn from California

California has long led the nation in promoting electric vehicles, and California’s experience offers a cautionary message to the nation as a whole. The California ZEV mandate has been strongly criticized by John D. Graham, former administrator of the Office of Information and Regulatory Affairs at the United States Office of Management and Budget. In 2012, Graham testified to Congress that:

The case for the California ZEV rule is certainly questionable, given the force of the following arguments:

•    California regulators cannot slow global climate change to a meaningful degree unless China and India control their greenhouse gas emissions, but the California ZEV program does not—and cannot—cover China and India;

•    The Obama administration, through a joint rulemaking of EPA and DOT [the Environmental Protection Agency and the Department of Transportation], has already mandated a sharp reduction in greenhouse gases from new cars and light trucks for model years 2017 to 2025 through a performance standard, a numeric standard based on carbon emissions that allows automakers to undertake some averaging of low-emitting and high-emitting vehicles (EPA-NHTSA, 2011);

•    The joint EPA-DOT rule already provides generous compliance incentives for manufacturers who offer ZEVs (e.g., a ZEV's "upstream" emissions at the electric power plant are ignored and each ZEV may be counted more than once in the compliance process) to supplement the federal government's generous $7,500 income tax credit to purchasers of ZEV-like vehicles;

•    The California ZEV program may not accomplish additional greenhouse-gas control (beyond the control achieved by the EPA-DOT joint rule) because any extra ZEVs produced and sold due to California's rule will be offset in the production plans of automakers by extra sales of more high-emitting vehicles in the 50 states covered by the EPA-DOT rule; and

•    The California ZEV program, by forcing automakers to sell more expensive vehicles that are cheaper to operate, will exacerbate greenhouse gas emissions due to two perverse behavioral responses: Some consumers will hold on to their old, high-emitting vehicles longer than they would otherwise, and those consumers who do purchase an expensive ZEV will drive them more miles each year because electricity is cheaper than gasoline.

We all want clean air, but pushing electric and plug-in hybrid vehicles onto the market on the back of a vast array of subsidies is not the way to attain it. It may, indeed, slow the pace of air quality improvements, putting people’s health at risk.

Kenneth P. Green is a resident scholar at the American Enterprise Institute.

FURTHER READING: Green also writes, “Dissecting the Carbon Tax,” “Energy Abundance vs. the Poverty of Energy Literacy,” and “Why Are Gasoline Prices High (And What Can Be Done About It)?” Mark J. Perry adds “Huge Subsidies Give American Taxpayers High-Voltage Shocks” and “Unplug Electric Car Subsidies.” Jonah Goldberg contributes “All (Green) Thumbs.”


Image by Dianna Ingram / Bergman Group

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