Buy an electric car, save the planet? not enough

Comment

It’s good to see legislative progress in addressing the effects of climate change, as reflected in the deal announced last week between Senator Joe Manchin and Majority Leader Chuck Schumer. But in some ways the offer falls short. In particular, subsidies for the purchase of electric vehicles may not be the best way to address global climate change.

The bill specifies a maximum tax credit of $7,500 for a new electric vehicle, increased from the status quo, and a new $4,000 credit for the purchase of a used one.

The first problem should be clear from recent experience with incentives and the resulting high inflation rate: When you pass money to consumers, it sometimes leads to higher prices. The risk is that these subsidies will lead to more expensive electric vehicles, not more electric vehicles.

Currently, the electric vehicle market is hit by some constraints on the supply side. For example, if you order a Tesla now, you may have to wait months. Ford and General Motors are producing electric vehicles, but this is hardly the major thrust of their production. At the macro level, the world does not have enough battery capacity to succeed with full-scale conversion to electric vehicles.

An alternative approach could be to focus on the supply side rather than the demand side. If policy can make electric vehicle batteries cheaper, more efficient and more available, then prices for electric vehicles will fall and consumers will buy more of them. Furthermore, instead of being limited to the US, the effects would be worldwide.

Of course it is possible that increasing demand for electric vehicles will help drive down battery prices and expand supply. But the simpler and perhaps more likely outcome is that, in the short term, both the prices and costs of electric vehicles will rise. US consumers will bid for scarce inputs from the rest of the world. Installing new lithium sources takes a long time, and a subsidy that won’t last forever (under the bill, it would expire in 2032) may not be enough to give the needed push. A better strategy may be to support new technologies for sourcing lithium.

Another motivation for electric vehicle subsidies could be to boost demand, stimulate production and prompt auto companies to find ways to reduce costs. This may be so, but note that a country with a rapid decline in cost per unit in a particular region is a country with a small number of major suppliers, perhaps only one or two. (The company that produces the most will end up with the lowest cost and maintain a strong market position.) If the electric vehicle market is somewhat monopolized, more of the subsidy benefits will go to businesses than customers.

I myself am not bothered by that result. But that is not how the policy is being advertised. And if businesses make as much profit as they can, electric vehicles may not be so popular.

The bill also has commercial elements, which are not ideal from a climate point of view. The subsidy only applies to North American vehicles, and battery components must be American over time, not allowing Chinese components. So to the extent the policy is in effect, it will tilt the market in the direction of American products.

This is hardly a surprising feature of US law. Still, US manufacturers may not be in the best position to solve the problem of affordable, scalable electric vehicles. Is it smart enough to push significant growth in electric vehicle production into a relatively high-wage market?

Some commentators have suggested that Korean automakers Hyundai and Kia will be the leaders in electric vehicle production. But they can see their greatest innovation and productivity gains outside North America, possibly in Europe or India.

Keep in mind that climate change is a global problem; Cutting US emissions will only do so much. This law could reduce emissions in the US, but makes them a little harder to achieve in the rest of the world, reducing its effectiveness.

It’s no secret why US law would have provisions that subsidize American consumers and businesses. But political justification is an explanation, not an excuse. Climate change is a global problem that demands global solutions.