On rebound from an SUV, last week I flirted with the idea of an electric vehicle (EV). It is now time for a reality check. EVs are really expensive. Nissan’s ‘Leading, Environmentally friendly, Affordable, Family car (LEAF)’ starts at $38,395. Nissan is redefining affordability, but I am not buying it. Even if an EV has an impressive range, where will I charge it on the road? Realistically, it can only be an extraordinarily expensive second vehicle — unless somebody else pays for it.
If you live in Ontario or Quebec, this can be arranged. Ontario’s Electric Vehicle Incentive Program pays $5,000 to $8,500 towards the purchase of a new EV. The LEAF gets $8,500 (by the way Nissan, it still isn’t ‘affordable’). When you purchase an EV in Quebec, the refundable tax credit for green vehicles takes $8,000 off your taxes.
These incentives encourage consumer adoption. Until recently, similar incentives were widely used to encourage hybrid vehicle adoption. Programs in B.C., Ontario, Quebec, and PEI provided up to $3,000 for the purchase or lease of a hybrid. The Quebec program is still continuing.
On analyzing these programs, we (two colleagues and I) found them to be not very effective. Approximately two-thirds of consumers buying hybrids during the programs would have bought them anyway. Taxpayers just subsidized their purchases.
Only a third bought hybrids due to the incentives. If they had not been offered the incentives, they would have bought small fuel-efficient cars instead. Consequently, overall fuel savings were small, and our governments spent a lot of money to generate them. The average cost to save a litre of fuel was 47 cents, and was $195 to save a tonne of CO2. At incentives of upwards of $8,000 per EV, we expect Ontario and Quebec to bear much higher costs for gasoline or carbon savings.
In Ontario, in addition to the cash incentive, EV owners also get green license plates allowing unrestricted access to High Occupancy Vehicle (HOV) lanes. Antonio Bento (from Cornell University) and his co-authors study a similar Clean Air Vehicle Stickers program in California. This program provides unrestricted HOV access to a limited number of hybrid vehicles. Even though the number of stickers is relatively small, they find significant congestion effects. Due to California’s program, driving time in HOV lanes rises by 9 per cent in morning peak hours. The authors argue that the combination of high congestion costs and restrictive benefits makes this policy very inefficient in transferring benefits to hybrid owners, approximately five times less efficient than cash incentives.
Whether it is cash incentives funded by all taxpayers, or reduced commute times underwritten by carpoolers, should we subsidize the rich buying EV’s? Is this the best way to promote a large-scale diffusion of the EV technology? Wouldn’t it be a better use of our resources to invest in charging infrastructure?
The inability to charge the EV away from home is probably the biggest impediment to their large scale adoption. Portability of fuel and an extensive network of fuel stations has allowed a proliferation of the internal combustion engine for personal transportation. However, developing such a network is the classic chicken and egg problem. There should be a large enough number of EVs for private companies to set up charging stations. If there aren’t enough charging stations, no one is likely to buy an EV. If our governments are serious about promoting EVs they would focus their investment entirely on providing minimal charging infrastructure. Equipping a few GO transit stations with charging points and hoping that retail stores do the same is not enough.
A shorter version of this post appears in the Globe and Mail’s Economy Lab blog.
Postscript: After this post was published in the Globe and Mail’s Economy Lab blog I received several emails/tweets/comments on other means to promote the adoption of EVs. There was also a comment on the post saying: why EV’s?
In response to why EVs, I have to defer to my engineering colleagues. It is a topic that I have no expertise on. From what I understand, the electric motor is significantly more energy-efficient than the internal combustion engine. If current day electricity generation is also more efficient / or powered by renewable sources, and transmission losses do not nullify this advantage, Electric Vehicles (EV) could play a significant role in reducing our greenhouse gas emissions.
Assuming that is so, what is the best way to promote EV adoption? I list my three preferred options.
- A carbon tax. If our aim is to promote energy efficiency and the use of renewable resources the most efficient instrument is a carbon tax. A carbon tax creates demand for carbon-efficient, and equivalently, energy-efficient everything. This includes power generation, and the motors used in transportation. With sufficient demand, large scale adoption of such technologies will ensue. However, despite its obvious advantages this is the least likely of all the options I list.
- Aggressive fleet level fuel-economy standards. Fuel economy standards for the fleet of vehicles sold in Canada are now harmonized with the US. These aggressive standards apply to each manufacturer selling light duty vehicles in Canada. They create incentives for manufacturers to sell fuel-efficient vehicles (including EVs) in order to meet their requirements. On the flip side, every fuel-inefficient (one that does not meet the standard) vehicle sold has an implicit cost to the manufacturer by making it harder to meet the standard.
- Investment in charging infrastructure. As I said earlier, logically, the biggest impediment to the large scale adoption of EVs is the inability to charge it away from home. In the absence of an aggressive carbon/fuel tax I believe this is the best option to target an increase in diffusion of EVs. So far the only program I know is by the government of Ontario which plans to equip a few GO transit stations with charging points.
- It is often proposed that subsidies should be provided to early adopters as a part of the policy mix to support EV technology. My article above is an attempt to strongly argue against this. These subsidies mostly target the affluent, are extremely expensive for the benefits they provide, and from what we found have a very small impact on increasing sales.
Recommended Reading
Bento, Antonio, Daniel Kaffine, Kevin Roth and Matt Zaragoza. ‘Clearing the air? The unintended consequences of the Clean Air Stickers Program in California’ 2011
Chandra, Ambarish, Sumeet Gulati and Milind Kandlikar (September 2010), “Green Drivers or Free Riders: An Analysis of Tax Rebates for Hybrid Vehicles,” Journal of Environmental Economics and Management, 60 (2), 57-144
