How Green Are Electric Vehicle Subsidies?

Economist says carbon tax, other strategies may offer better ways to address climate change.

Should the government offer subsidies on sales of electric vehicles? California and the U.S. governments already offer tax credits for all-electric and plug-in hybrid cars. And national climate plans call for investing in EVs — and funding incentives for consumers to buy them.

But a UC Davis energy economist says such plans are premature and could backfire. “Going all in on EVs is like putting all our eggs in one basket while we’re still making the basket,” says David Rapson, an associate professor in the Department of Economics.

Rapson advocates instead for making it more expensive for industry and individuals to emit greenhouse gases into the atmosphere. A cap-and-trade or a carbon tax would create incentives for consumers and firms to choose whatever technology is optimal for them, he says.

“I’m not making any arguments about economic efficiency or growth (although those do apply). My perspective simply prioritizes mitigating climate damages. There’s too much hopeful thinking around EVs. It could turn out to be right; but it’s a roll of the dice.” — David Rapson

A civil debate on cars and climate

He made his case recently in a public online debate hosted by equity firm Mobility Impact Partners — and won many viewers over to his point of view. More than 300 transportation industry representatives, policy professionals, investors, researchers and scholars logged on to watch the live Zoom session.

Rapson argued against direct government support for EVs, while Costa Samaras, an associate professor of civil and environmental engineering at Carnegie Mellon University, argued in favor of the government promotion of EVs. In polls taken before and after the March 3 debate, 12% of respondents shifted toward Rapson’s position and 8% moved away from Samaras’ viewpoint.

“We were all surprised by the outcome,” said Steve Hellman, managing partner of the equity firm and the debate’s organizer. “Today we are told that nothing can shift people’s entrenched opinions. Apparently, no one tried reasoned, sensible debate.”

The hour-long debate is the first in a series planned by the New York-based firm on the future of transporting people and goods. “Many of our partners have encouraged us to use our convening power and neutral platform to facilitate constructive public policy debate,” Hellman said later in an email interview.

Rapson said the debate was unusual not only in its civility but also in including an economics perspective on transportation and climate — topics where discussions tend to focus on engineering and technology solutions.

Political support, consumer reluctance

President Joe Biden’s $2 trillion climate and infrastructure plans call for converting the federal fleet to EVs, adding a half-million EV charging stations nationwide and providing $174 billion in tax credits and other incentives for EV battery manufacturers. Senate Majority Leader Chuck Schumer (D-NY) is proposing discounts to encourage American drivers to trade in their gasoline-burning cars for electric ones.

A number of automakers have announced plans to increase production of electric vehicles, with General Motors saying it would end manufacturing gasoline- and diesel-fueled passenger vehicles altogether by 2035.

However, while sales of EVs are rising, they total less than 1% of vehicles on the road. “I know this might not be popular to say out loud, but people don’t seem to like EVs very much,” Rapson said in his debate opening remarks.

There are other ways to reduce car emissions, with possible technologies yet to come, he said. “EVs may be the right answer to addressing climate change, but are they the only right answer? Neither I nor anybody else really know.”

Samaras, on the other hand, argued that subsidies are needed to encourage drivers to swap their gasoline-powered cars for zero-emissions electrified ones. And that there is little political will to impose taxes on carbon. “We shouldn’t wait for what technology is to come later, because we will be perpetually waiting,” he said.

Potential for bridging partisan divide

But Rapson said there could be many unintended consequences from subsidizing EVs. Among them:

• Putting more cars on the road.
• Failing to reduce gas cars.
• Promoting EVs in regions that rely on coal-fired electricity plants.
• Making older gas-fueled cars scarce and more valuable so they last longer.
• Driving down the price of oil, leading to higher use of gasoline in developing countries.

“In the U.S. there’s a real opportunity here to reset our politics with this issue,” Rapson said in his closing statement. “Americans want action on the climate, and the best policies, which are necessary but perhaps not sufficient, are natural ones for Republicans to support. We need to continue to do the hard of work of bridging the partisan divide on this issue. Collective action problems cannot be solved unilaterally."

A tectonic shift in investment

Debate organizer Hellman said growing investments in EV-manufacturing suggest a shift is already taking place. “While investor sentiment infamously ebbs and flows, this shift (while it will undoubtedly strengthen and weaken) feels real and permanent,” he said.

Government support may be “a second-order issue,” Hellman said. Investors began warming to EVs during the administration of former President Donald Trump, who threatened to roll back emission standards and eliminate EV tax credits, he said. “Now it has tailwinds under the Biden administration. Obviously, tailwinds are better than headwinds, but the underlying tectonic forces are in place — and most of the government activity affects the pace and outcome only on the margins.”

— Kathleen Holder, content strategist in the UC Davis College of Letters and Science