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The EV Revolution Will Be Heavily Subsidized

What is the Demand for EVs – really?

When I envision the future in the Age of Aquarius, it lacks sound. Panther-like EVs, powered by Zen-monastery-quiet solar PV, are zipping down highways made from recycled tires. The thunderous sound of the combustion engine will only exist in the memory of petrol-heads like myself. But in order to get there, people must want to and be able to buy these cool cars. When I teach my Evening/Weekend MBAs (shoutout to the Axe and Oski cohorts!), we discuss the demand for new and socially desirable technologies and how one “pushes” new gadgets into the markets. The answer to this, in many cases, is you subsidize new technologies. A subsidy (duh) makes the good cheaper to the consumer and (s)he is more likely to buy the EV.

In California, we’re super ambitious. We all eat kale. We also want to see 1.5 million Zero Emission Vehicles on California’s streets by 2025. And 5 million by 2030.  That’s 6 and 11 years out, respectively. So we’re going to throw some money at the problem. Our schools and roads are falling apart, so the question we should be asking is, how much is it going to take to get these cars on the road and is it the best use of public funds? There are some older reports out there that use the early EV subsidies to estimate consumers’ response to these programs, but to put it bluntly, these subsidies largely went to rich people buying Teslas. Until now, we knew relatively little about the response of people buying non ridiculously expensive cars.

Enter Dave Rapson and Erich Muehlegger of UC Davis and frequent visitors to the Energy Institute. During the busy holiday season they published a working paper that fills this important gap. They study the impacts of the Enhanced Fleet Modernization Program (“EFMP”), which is a California retire-and-replace subsidy program for EV purchases. The design of the EFMP program provides clean quasi-experimental variation in the availability of the subsidy to some buyers and not others. This is nerd speak for: “Woah. Cool statistics. Let me Scotch tape my broken glasses together and read on.” In short, this paper is causal, not casual.

Another cool part of the program is that eligibility is means-tested, which targets subsidies at low- and middle-income buyers. This has never been done before.

Due to a jealousy-inducing dataset– the universe of electric vehicle sales in California, which accounts for 40 percent of EV purchases in the United States and 10 percent of purchases worldwide– they are able to estimate two policy-relevant parameters: the rate of subsidy pass-through and the elasticity of demand for EVs among low- to middle-income buyers. The first thing tells us something about how much of the subsidy is captured by consumers (versus manufacturers). They show this to be at 80 to 100 percent, which is good. Their estimated demand elasticity – the second thing – is -3.9, implying that a subsidy that decreases the purchase price of an EV by 1 percent will increase demand for that EV by 3.9 percent! This seems like a big number – and it is. The same number for electricity is about -0.3 – an order of magnitude smaller.

So, where’s the Debbie Downer paragraph you ask? Let me oblige. Frankly, the number of EVs sold even in California is relatively small. One prior “study” puts the cost of subsidies out to 2025 at between $2.2-2.9 billion. Muehlegger and Rapson’s estimates suggest that getting 1.5 million EVs on California roads would require subsidies of $9-14 billion! The authors carefully describe the limitations and assumptions of their study, but reading the paper carefully shows that the subsidy number may actually be much bigger than they state.

So what are the options here? Should the California taxpayer foot the entire bill? Everybody loves a subsidy. Consumers like them! Manufacturers like them! Politicians like them (because consumers like them)! But the money has to come from somewhere. One avenue to protect California taxpayers is to hope for a continuation or expansion of the federal tax credit for EVs, but that is not likely in the current environment.

The smarter idea is a feebate. The idea is simple. If you buy some ridiculous SUV that is big enough to take your entire house in the glove compartment, and which gets terrible gas mileage, you pay a tax. A gas guzzler tax. And that tax should be significant. If you buy the Toyota Kumbaya (the obvious name for the successor to the Prius), you get a hefty subsidy, which is financed out of the revenue from the gas guzzlers. If you want a gas guzzler badly enough, you can have it. But you pay the full damage it does. It’s fair, efficient and economists don’t hate it. Which is probably why it’s not policy. Why do we not love it? It still misses the usage margin, which a carbon tax does not. So yes, I am going to conclude another blog post with the call for a national carbon tax. Maybe we should call that the Kumbaya Tax.

Suggested citation: Auffhammer, Maximilian. “The EV Revolution Will Be Heavily Subsidized.” Energy Institute Blog, UC Berkeley, January 28, 2019, https://energyathaas.wordpress.com/2019/01/28/the-ev-revolution-will-be-heavily-subsidized/

Maximilian Auffhammer View All

Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.

22 thoughts on “The EV Revolution Will Be Heavily Subsidized Leave a comment

  1. Infant industry subsidies have been a part of our nation’s economic history, and EVs are no exception. Land grants to railroads opened the West for development. Air mail subsidies launched commercial air travel. Semiconductors received space and military subsidies, and today nearly every one of us has a phone with more processing power than NASA used to help Neil Armstrong first step onto the moon.

    California electricity consumers also engage in dozens of other subsidy programs, each of which has a purpose, a constituency, and a rich political history.

    The CARE and FERA programs provide up to 35% bill discounts for qualifying low-income customers. Those benefits substantially go to the poor, not the rich. Many other states do not have such programs.

    California applies the same retail electric and gas rates to single-family residential customers as to apartment residents, even though the cost of providing electric distribution service is much lower to apartments, since the utility runs a single line to a building, and serves up to 200 customers with that single connection. These benefits go substantially to above-average income residents of single-family dwellings. Nevada, on the other hand, charges multi-family customers about 8% lower rates than single-family customers.

    California apportions free carbon allowance to some (but not all) industrial customers. These benefits go to the eligible industries.

    Yes, launching the EV industry involves incentives to early adopters. That approach has worked extremely well in developing markets for energy-efficient appliances, new building code standards, and other innovations. Each of these EV purchasers is laying out tens of thousands of their own dollars, and receiving an incentive that is a small fraction of the total cost. If this enables a jumpstart to an industry that can reduce air quality problems, balance of payment problems, international security problems, and ultimately safety, mobility, and quality of life improvements, it may be at least as good an investment as existing incentives for fossil fuel development.

  2. Why the concern about subsidies, since they’ll be gone in a few years as electric cars become cost-competitive and then cheaper than ICE? And don’t forget this is due to subsidies and the vision and capabilities of many EV pioneers, especially Elon Musk. Subsidies will be nill, then privately owned cars will go away with transportation as a service.
    I’ve owned a Model S for 6 years and agree that the car taxes should be based on environmental impact costs, including pollution, weight and miles driven.

    • The subsides accomplished nothing regarding EV adoption, except putting bucks in the pockets of the uber-wealthy. Or do you think someone willing to drop $80,000 for a sports car is motivated by saving $7,500?

      If I used subsidies to drop the price of a Wagyu steak from $128 to $118, you think I’m actually going to sell a whole lot more steaks? And if I did, who would benefit?

      Studies show discounts motivate bargain hunters, and high end sports car owners are by definition not bargain hunters, otherwise they wouldn’t be in the market for a sports car.

      What is driving demand is lowering prices, taking things that were considered luxury items and pricing them for the masses. And, naturally, once the masses start buying something in bulk, we need to immediately cut the subsidies, because we can’t afford to subsidize more than a small fraction of total sales.

      Aluminum was once so rare and valuable, we capped the Washington Monument with it. Today we make soda cans from it. No subsidy made that happen. technology did.

      • “Aluminum was once so rare and valuable, we capped the Washington Monument with it. Today we make soda cans from it. No subsidy made that happen. technology did.”

        Not true. In fact the highly subsidized Columbia River Project with its many federal government dams run by the BPA made aluminum smelters economic.

        • And government subsidized the schools that made the engineers that designed the dam. But the parents subsidized the birth of the engineers. But they were convinced to make love by romantic Hollywood movies. So really, the growth of the aluminum industry was directly subsidized by Gone with the Wind.

          Your point is absurd.

          Bottom line – we CANNOT afford to subsidize enough money to enough people, to put enough EVs on the road to make the slightest difference. We would be vastly better served taking the $10 billion or so and devoting it to inventing better and cheaper batteries than can be used by manufacturers to make better and cheaper cars without any subsides at all. or taxing people less, so they have more money to afford electric cars.

          • You claimed that aluminum was made without subsidies. That was entirely incorrect, as the Columbia River hydrosystem that was heavily subsidized made victory possible for the Allies in World War II. Your response changed the subject to claim instead that subsidies are flowing everywhere. And that is the point of Michael Hutcheson.

          • You are stating that cheap aluminum would not have happened without cheap electricity. And since the government subsidized a hydroelectric dam which provided some of that cheap electricity, then in fact the government is responsible for making aluminum cheaper. That is not how economics work.

            I provided you with a silly causational chain of logic that follows your own – Hollywood movie studios are actually responsible for cheap aluminum. It doesn’t make any sense and that is exactly the point – neither does your example. But that fact you can’t follow it was predicated by your initial response.

            Try this on for size – ONE of the factors leading to cheap aluminum (along with discovering large deposits of bauxite outside the U.S., importing them, and finding a way to efficiently smelt the ore into aluminum) was cheap electricity, and ONE of the sources of cheap electricity was hydroelectric dams, and ONE of those was the Columbia river project.

            Would we not have aluminum today if the Columbia River project had never been built? Of course we would. Is the Columbia River project responsible for cheap aluminum? Of course not – what a silly idea. I might note other countries, bereft of the benefits of the Columbia valley, also have aluminum.

            Correlation is not causation, and things have many parents.

            The large point is this – we want more EVs. I agree on that goal. But we can’t afford to subsidize enough EVs enough money to make any difference. That should be obvious with a little math.

            The explosion of car ownership in the 1950s didn’t occur because the U.S. subsidized Ford motors. It occurred because the government built roads. That created demand for cars. Demand for cars caused increased sales. Increased sales volume allowed reductions in unit costs. Which spurred more sales.

            Want more EV sales? Make EV ownership attractive. I’ll give you a freebee – pass a law that charging stations have to be universal – no exclusive car charging networks. That will spur more competition. Huge impact for zero cost.

            If I subsidize one EV I have added one EV to the road. But each infrastructure point can service many EVs, making ownership easier and ultimately cheaper, increasing demand. So give a tax break for adding a functional charging station to any parking lot. Make EV ownership easier, and demand will grow, and as demand grows, production will increase, and unit costs will drop around 15% for each doubling of sales volume.

            Heck make all parking meters and street lights in a city into charging stations. Hey – If you buy $5 of electricity you get two hours of free street parking! Eventually, once EVs are ubiquitous, you can cancel that bonus. And you can make money from the electricity sales at your government owned street charging stations. You’ve now monetized your street parking even further. A level 1 charging station cost just $500. You could go to level 2 for $5,000. Say each one is selling 400 kwh a day, at $0.30/kwh, you’ll make $120. That’s $60 profit. Pay back your charging station costs over a few months or years.

            The problem with Greens is not usually your goals, but that fact you are too economically and scientifically dimwitted to figure out the best way to achieve them. In fact you routinely settle on the policy least likely to achieve them. EV subsidies is exactly such a policy.

          • Again, you made the claim that aluminum was made cheap without subsidies from the the government. I made the point that your statement was incorrect, and now you have acknowledged that I was correct. And I stand by my point that the burst of the Columbia River aluminum industry was critical to making it a cheap everyday consumer item instead of a high cost aerospace material. All of the other global industrial sites followed the innovations in the Northwest.

            Now you come up with yet another misexample that ignores the huge defense subsidies used to build the interstate highway system in the 1950s that led to the proliferation of automobile technology. You need to come up with a different set of examples.

          • If you are that desperate to be right, take the win champ. But Iet me first explain what you are missing.

            Each termite has about 25,000 neurons. For comparison, the human cerebral cortex contains 16 billion neurons. So humans are a lot smarter than a termite. But termites can build a rather sophisticated termite mound. How does this happen? Is there a really smart government termite that directs their actions? Nope. Individually they are dumb. yet they exhibit complex behavior, and construct well designed homes. How is that possible?

            There is a term in nature called “Emergence”. Emergence occurs when an entity is observed to have properties its parts do not have on their own. These properties or behaviors emerge only when the parts interact in a wider whole. Termites have 1-2 million individuals in a mound, and the interaction of that many individuals creates emergent behavior resembling a significant collective intelligence – almost as much intelligence as a single human being. That is what guides the termites in building a mound.

            Capitalism is best defined a method for determining the “best” use for limited goods and services. For examples, we only have so many tons of copper – what is the best use for it? Copper statues, or copper wire? How about copper wire or solar panels? How about copper wire, and slightly thicker or thinner copper wire? How do we decide? We bid on it. Stupid and wasteful uses for the copper fall by the wayside – I can make more money making it into copper wire than the other guy can making copper statues, hence I can bid (pay) more for the copper. Better still, if there is a huge need for copper, high prices tell miners to buy equipment and hunt up some more. And all of this is happening at lightening speed billions of times each day. Attempting to maximize the benefit of each and every resource on the planet.

            What happens is an emergent intelligence of the marketplace, a super computer operating at frightening speed. We are taking the 16 billion neurons of each human and multiplying them by millions or billions.

            Progressives look at something like how aluminum got cheaper and search for the mastermind, the entity that made it cheaper. Usually they settle on the government, only because that is the only constant they see, they only entity with a person in charge making decisions, a body holding the clipboard. It’s like deciding the termite queen MUST be directing the termites.

            Over and over Greens pursue the centrally planned, top down, command and control solutions to every problem. We must FORCE people to do this and PREVENT people from doing that. It works, sorta. but slowly, inefficiently, wastefully, and sometimes catastrophically.

            A better solution is to harness the emergent intelligence of the marketplace, which is literally millions of times smarter than any individual or group of individuals will ever be.

            Here is an example of oafish green polices: RPS standards. The first thing they did was narrowly define what power sources would be classified as “renewable”, what resources would “count”. But this is inherently stupid solution, because, do we care whether a renewable resource is used, or do we care about how many tons of carbon dioxide are emitted? A smarter way, a way in which would have harnessed the power of the emergent superintellegence, would have been to simply specify carbon intensity, regardless of the source of energy. You might end up with solar and wind. Or carbon capture, nuclear, batteries, improved hydro, geothermal, planting more trees, more efficient generators, etc. etc. Salton sea would be pumping out million of carbon free kwhs. Or not. Maybe there is something better. Maybe reducing demand would have been better. LEDs? Insulation? Maybe the utility installs and owns solar panels on individual roofs? Maybe they purchasing clunkers and giving away electric cars will reduce carbon intensity faster than shutting down the coal plant, with the end result being lower total emissions? Maybe the solution changes and evolves rapidly over time?

            Point is we don’t know the best answer. Nobody does. But focusing the emergent intelligence on the problem means essentially every possible solution will be tried and tested simultaneously, and the best solution (cheapest, fastest, least disruptive) will be rapidly developed and deployed.

            Greens obsess over the idea that there has to be a singular person or group with a clipboard overseeing everyone’s actions. And that is why they fail. And that is exactly what you are doing with the price of aluminum – assuming that a singular actor was responsible for anything and everything.

  3. Question. Assuming you have a good policy reason to want a market to move from product X to product Y (and quickly), are the optimal incentives you would use to entice people to choose Y over X the same under the assumption that the relative prices of X and Y will remain the same over many periods as they would be if you assume that that increased volume in Y will drive down the price of Y relative to X? And if so, how do you calculate the correct incentive? It must depend on how fast you want this substitution to happen and the steepness of that experience curve, right?

    It seems that if you think EVs are important, this is the number we should be seeking, which might be higher than what a simple equilibrium model would suggest. Even if you pursue a carbon tax rather than a direct subsidy, you would want to set the carbon price at this number. (Unless it is high enough to draw forth the pitchforks and torches, of course.)

  4. A feebate could have very high welfare costs. Once you have Acemoglu’s carbon tax and R&D subsidy, the welfare foundations of an EV subsidy are not well established. And the carbon fee would have to be much higher than socially optimal, especially in light of the Gayer-Viscusi case for a low domestic (California) tax (and the weakness of Kochen’s counter-argument based on the Folk Theorem). Then factor in the Goulder-Williams tax/subsidy exacerbation effects (possibly an order of magnitude larger than the Harberger triangles) and you’re looking at a lot of potential waste.
    Someone needs to explain why Californians buy 40% of EVs. Sounds a lot like a rat race to be greener than thou. If that’s the case, an EV tax may be indicated.

    • And what is wrong with “a rat race to be greener than thou”? Almost all of the new consumer technologies that we have enjoyed over the last century and a half began as luxury goods for which the wealthy paid a premium to start. And as Jim Lazar points out, many of these had subsidies of some form to kick them off. The math of economics can look nice, but the underlying assumptions often undermine the real answers.

  5. The Energy Innovation and Carbon Dividend Act of 2019, just introduced in the House of Representative with bi-partisan sponsorship, would offset some or all of the regressiveness of EV subsidies by recycling carbon tax revenues through equal dividends to all adults (and half dividends to every child). A 2017 Treasury Department study estimated that the first six to seven income deciles would benefit or at least not lose money under such a revenue recycling scheme. The bill’s rising fee on fossil fuels would also supercharge the incentive effect of EV subsidies, accelerating mass adoption of cleaner vehicles and allowing a faster phase-out of subsidies. Last but not least, the prospect of such a fast-growing market for EVs should also accelerate innovation in technology and production efficiencies in this sector. Kumbaya!

  6. One more caveat to the Auffhammer blog on EVs… Yes, feebates are a good alternative to taxpayer subsidies, but another is an actual policy likely to be adopted this year in California: diversion of LCFS (Low Carbon Fuel Standard) “credits” to EV purchases. In essence (some of) the credits accrued by electric utilties for selling electricity to EVs would be aggregated statewide and packaged into point-of-sale rebates to new EV purchases. We estimate that it will amount to $2000 per EV purchase–covering just about all the “required” subsidy estimated by my colleagues Dave Rapson and Erich Muehlegger.
    Dan Sperling

  7. Giving subsidies for EVs is welfare for the rich. To get a rebate you MUST take an IC vehicle off the road. I am not talking those ‘shells’ sitting in some yard with weeds in it, but a registered and operational one. New-car tax could be based on the as-sold/ equipped weight. Road tax [the annual reg fee etc] should be based on miles driven – can be captured in a quick smog-test-like visit. Subsidies and rebates [just like bonuses] can be quite easily manipulated.

  8. How do you “value” the “incentive” for EVs that comes in the form of being allowed, as a single-occupancy vehicle, into the carpool lanes on the freeway? Isn’t that a form of “subsidy” as well?

    I’ve heard that some people are buying PHEVs, like the Kia Niro or Prius Prime, for the sole purpose of access. They don’t expect or intend to plug them in at all. As a Kia Niro PHEV owner, this seems silly to me — why waste a great feature. But the federal tax credit on the PHEV Niro brings the acquisition cost down to equal that of the hybrid Niro, so I guess if you don’t have a place to plug in at work or home, it’s still a zero-incremental-cost option to get into the carpool lanes.

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