Subsidies make EVs competitive with gas-powered cars, but are they a good use of scarce tax dollars?

My brother-in-law Doug bought a Chevy Volt a few months ago. He loves the car, but without new subsidies from the federal and BC governments, the sticker price would have killed the purchase. A new study from economist Blake Shaffer suggests that Doug may be typical of most Canadian consumers as subsidies shift the economics of EV ownership, with the electric option now competitive with gasoline-powered autos in British Columbia.

The two biggest constraints to EV adoption are capital cost and range. EV battery performance is steadily improving and the distance pure electric cars (BEVs) can travel between charges has risen to 500 kilometres for a Tesla S (MSRP $114,800 – $133,700) on the high end and 185 kilometres for a Ford Focus Electric (MSRP $33,698) on the low end.

Source: BC government.

Ottawa’s new Zero Emissions Vehicle subsidy provides up to $5,000 toward a BEV or PHEV (plug-in hybrids). BC offers another $5,000 and up to $6,000 under its SCRAP-IT program. If a buyer qualified for the maximum support, the price of a small EV like the Focus Electric becomes competitive with an equivalent internal combustion engine (ICE) auto.

Shaffer used data from Natural Resources Canada to calculate the cost to drive 100 kilometres for a number of EVs and the two most popular ICE vehicles, the Ford F-150 and Honda Civic. He used the Metro Vancouver gasoline price of $1.70 per litre and $0.14 per kWh for the electricity cost.

“[M]ost EVs cost only $2 to $4 to drive 100 kilometres. This compares to $12 in the Civic, and $18 for the F-150,” he concluded. “For a household driving 16,000 kilometres per year, the choice of an EV over a comparably-sized ICE car results in roughly $1,600 of annual savings.”

The Calgary-based economist says anecdotal evidence suggests EV buying households are adapting their driving habits to accommodate the lower range of an electric car. Doug, for instance, commutes to work in heavy, stop-and-go Vancouver traffic that lowers fuel efficiency in his ICE vehicle. His family has kept a pickup truck for longer trips while the Volt is used to get to work and grocery getting.

Shaffer is considering buying an EV for similar reasons.

“We’re looking at a combination of an EV running around town and short trips out of town, so 400 kilometers of range works reasonably well for us, then a gas-powered car for longer trips and where we’re taking the baby to daycare kind of thing,” he said in an interview. “I find that that kind of adaptation by consumers is becoming more common.”

BC EV charging stations. Source: BC government.

BC passed the Zero-Emission Vehicles Act on May 29. The legislation mandates an increasing percentage of cars sold in the province to be powered by electricity or some other zero-emission fuel, like hydrogen. The goal is by 2040 to have all new light-duty cars and trucks sold in the province be clean energy vehicles.

Subsidizing EV purchases is an expensive way to reduce greenhouse gas emissions, Shaffer admits. He cites studies that estimate subsidies cost between $395 a tonne and $1,000 a tonne, far higher than the current $30 a tonne federal carbon tax. While “spill-over benefits,” such as lowering urban pollution, the real benefit of subsidies to change consumer behaviour, he says.

“Early adopters aren’t swayed by the rebates. They’re buying for the technology, for the novelty,” he said, noting that when the subsidies are taken into account, “You don’t need to be green-minded. You don’t need to be an early adopter, you simply want to save money.”

Subsidies also lower the payback of the higher purchase price of an EV to two years in BC. In Alberta, thanks to lower gas prices, the payback period rises to eight years with the federal rebate and 15 years without.

How long should the generous subsidies last? Not long, argues Shaffer. “I’m okay with a limited rollout to get the ball rolling and get past the early adopter, get these cohort effects and infrastructure benefits happening,” he said. “But then very quickly step back.”

Economist Blake Shaffer.

The “cohort effect” Shaffer refers to is the tendency of consumers to be skeptical about the promised benefits of a new technology or product until the claims are borne out in the real world. As EVs become more popular and owners share stories with neighbours and co-workers, consumers become more positive and sales grow more rapidly. This is the “prime the pump” argument governments often use to justify providing subsidies.

Do subsidies work? In Norway, the poster child for EV adoption, electric cars accounted for 58 per cent of all new vehicle sales. Shaffer says that the current market share of EVs is roughly 2.5 per cent of all vehicles sold in Canada, in line with the global average, but within the car class alone the share is closer to eight per cent. “In BC, the EV market share of cars has already passed 15 per cent and given the province’s currently high gas prices and generous EV incentives, we should expect to see the share climb in the years ahead,” he said.

The BC government committed $42 million to its subsidy program, then quickly topped it up with another $10 million when funds ran out. That’s enough to subsidize 5,200 sales if every buyer received the maximum. British Columbians buy over 200,000 autos a year and there are about 3.7 million in the provincial fleet. Unless public support increases dramatically, it may take some time before EVs can put a significant dent in those numbers.

Are EV subsidies are a good use of tax dollars?

Not in the long run because the cost to eliminate a tonne of emissions is exorbitantly high, but probably in the short-run to grow the market until consumers are driving sales, not governments.

Will governments be able to wean voters off EV subsidies? If Doug is any example, free money for a new car should be pretty popular, and politicians may find that launching subsidies is much easier than ending them.

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