Energizing the Electric Car Market After the Crisis
In the face of global uncertainty, policymakers should consider multiple scenarios for the future of electric vehicles.
Climate policy amidst the COVID-19 pandemic is tricky. Many people are struggling through the immediate crisis, or will be soon. The climate crisis looks more distant in comparison. But for the energy sector, addressing climate change will remain a central challenge. Thus, it’s important that we think through how the COVID-19 economic crisis could impact climate progress, and what policymakers should do about it.
Transportation emissions impact both climate and human health, potentially even linked to COVID-19 vulnerability. Coming into the COVID-19 crisis, sales of electric vehicles were picking up. From 2011 to 2019, annual electric vehicles sales increased 19-fold. Whether electric vehicles exit the crisis on a similar trajectory is far from assured.
To think through the future of electric vehicles, I find it helpful to imagine several scenarios for how the pandemic could play out. I’m going to use three scenarios put forward by Deloitte, a management consulting firm. Deloitte focuses on the general economy, but we can use their work to consider how electric vehicle adoption could be impacted.
- Mild Economic Case – a Deep but Quick Recession
In Deloitte’s Mild Economic Case, the spread of the virus slows down in the summer, then testing and tracking allows for gradual resumption of economic activity in the fall. The US economy experiences a deep but quick recession. Consumer demand picks up in the second half of 2021.
To restart the electric vehicle transition, an increasing percentage of consumers will need to choose electric over gasoline. The existing set of state and federal subsidies and regulations that have helped the electric vehicle market so far can play a big role.
For consumers this includes federal tax credits and state-level subsidies. The up-front cost of an electric vehicle is still greater than for a gasoline vehicle, so these incentives have been very important drivers of consumer decisions. Many households could exit the recession with lower incomes, so these incentives will be even more critical. Federal and state governments would need to maintain and grow their commitments to these subsidies.
This could be difficult in a budget-constrained environment, but China illustrates the risk of cutting subsidies too soon. The government there reduced electric vehicle subsidies in 2019 and the market collapsed, even before the current crisis.
Electric vehicle mandates will also remain important. Several states, led by California, have Zero Emissions Vehicle (ZEV) regulations mandating that clean vehicles sales make up a certain percentage of an automaker’s total sales. The mandate is set to rise from 7% in 2019 to 22% in 2025. Automakers that don’t sell enough ZEVs can buy credits from automakers that sell extra ZEVs (think Tesla). Some portion of the ZEV credit costs or value is passed on to the end consumer, further tilting consumer demand away from gasoline vehicles and toward electric vehicles.
If the regulations survive the Trump Administration’s efforts to kill them, they would continue to drive the electric vehicle transition in the Mild Economic Case.
However, the electric vehicle transition could face some new headwinds in the post-crisis period.
One looming challenge is the prospect of low gasoline prices. The drop in oil demand and Saudi Arabia’s decision to revert to competitive behavior have driven prices down. If prices remain low, gasoline vehicles will be more appealing relative to electric vehicles, especially in regions with low gasoline taxes and inflated variable electricity prices. To counteract this, we need reforms that bring gasoline and electricity prices closer to their underlying costs.
Adding insult to injury, the Trump Administration put a new speed bump in front of the electric vehicle transition. The final Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule lowers the average fuel economy and carbon dioxide standards that automakers must meet for their model year 2021 to 2026 vehicle sales. Electric vehicles also lose a special incentive they received under the prior standard, making it less likely that automakers will rely on increased electric vehicle penetration to comply with the rule. Pricing reforms, enhanced subsidies and new approaches will be urgent in this new environment.
- Harsh Economic Case – a Prolonged Recession
In the Harsh Economic Case, the US has a severe COVID-19 outbreak that lasts until early 2021. The US experiences a prolonged recession. The recovery doesn’t speed up until the second half of 2022.
This scenario presents some added challenges.
Learning-by-doing has been an important driver of cost reductions in the energy sector. Solar, wind and fracking have all dropped in cost as developers have gained more experience. But if people aren’t buying as many new electric cars or driving as much, car makers will learn less about how to improve technologies and cut costs. Battery cost reductions could also slow.
There are ways that policymakers could counter this slowdown. For example, governments could increase per vehicle subsidies so that electric vehicles represent a higher percentage of total sales. Since overall sales would be lower, the budget burden of a higher per-vehicle subsidy would be less.
Policymakers could also focus on ways to make use of the pause in the growth of the vehicle fleet. For example, once construction activities are allowed to restart, the deployment of electric vehicle charging infrastructure, including high speed charging, could be accelerated with government funding. This could include subsidies for chargers in multi-family buildings. Then, once consumer demand picks up again, people will have greater confidence that they’ll have access to charging.
Research and development (R&D) funding, including subsidies for corporate R&D, could be expanded. With technology developments, perhaps the post-crisis electric vehicles could be even better than the pre-crisis ones.
- Severe Economic Case – Climate Change Policy Deprioritized
Deloitte’s Severe Economic Case involves a failure to stop the pandemic. The virus returns in multiple waves. Severe infection rates continue well into 2021. The economic recovery doesn’t even begin until 2022.
All the challenges of the milder scenarios are multiplied. Stimulating electric vehicle adoption would be very difficult since people are not driving very much at all for two years and are not buying new vehicles of any kind. However, certain sectors could present big opportunities though, such as delivery vehicles. As in the prior scenario, investing in charging infrastructure could lay the foundation for the future.
For a whole host of reasons, let’s hope this is not the direction the world is headed. While the singularity of COVID-19 demands policymakers’ attention, let’s not forget the importance and urgency of climate change policy. Whether that means calling out the Trump Administration’s continuing efforts to roll back environmental and climate regulations, or being vigilant that clean transportation policies get written into stimulus bills, I believe this moment is going to stand out as a critical test in the fight against climate change.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas
Suggested citation: Campbell, Andrew. “Energizing the Electric Car Market After the Crisis” Energy Institute Blog, UC Berkeley, April 13, 2020, https://energyathaas.wordpress.com/2020/04/13/energizing-the-electric-car-market-after-the-crisis/
Andrew G Campbell View All
Andrew Campbell is the Executive Director of the Energy Institute at Haas. Andy has worked in the energy industry for his entire professional career. Prior to coming to the University of California, Andy worked for energy efficiency and demand response company, Tendril, and grid management technology provider, Sentient Energy. He helped both companies navigate the complex energy regulatory environment and tailor their sales and marketing approaches to meet the utility industry’s needs. Previously, he was Senior Energy Advisor to Commissioner Rachelle Chong and Commissioner Nancy Ryan at the California Public Utilities Commission (CPUC). While at the CPUC Andy was the lead advisor in areas including demand response, rate design, grid modernization, and electric vehicles. Andy led successful efforts to develop and adopt policies on Smart Grid investment and data access, regulatory authority over electric vehicle charging, demand response, dynamic pricing for utilities and natural gas quality standards for liquefied natural gas. Andy has also worked in Citigroup’s Global Energy Group and as a reservoir engineer with ExxonMobil. Andy earned a Master in Public Policy from the Kennedy School of Government at Harvard University and bachelors degrees in chemical engineering and economics from Rice University.
I am sorry but this is weird logic. You want to have action on climate change, but the only action that matters is leaving fossil carbon in the ground. That means transition of the economy, not recovery of the old one. OK, you say that you want to see people rush out and buy electric cars. Somehow buying lots fo cars is the answer. That is sadly not the case, and people losing their jobs and security are not in the market to make you happy by buying a car. They are in the market for transition to a way of life that doesn’t need a car.
There was one point today Tesla China was selling a model 3 every 6 seconds.
Actually, it would be better if governments stopped their efforts to control the outcome entirely, and instead simply encourage businesses to consider remote work for jobs it makes sense for. EVs will truly be a cheaper and better choice in less than a decade, using subsidies generally only helps the wealthy to moderately well off virtue siping also at the cost of the lower half.
In any event, it is already too late for governments to make a meaningful difference in the outcome with respect to effects on climate. The world will mostly have abandoned fossil fuels by about 2050 for the same reasons we stopped buying typewriters and steam engines- better products at lower prices.
That’s the same thing that Herbert Hoover said in 1930. It took decisive action by the government led by FDR in 1933 to reverse the downward spiral of the Great Depression. It also took government action to decide pave local roads early in the twentieth century and again to build super highways in the 1950s to enable the use of automobiles. And it took the government awarding railroads right of ways in the 1800s to extend lines across the U.S. The past is rife with examples of the government intervening to redirect the economy and encourage technologies. Don’t buy the mythology that this is all about “market forces.”