Every weekend we dig into the archives. This post by Stu was originally published in May 2016.
Imagine, for a moment, that I was trying to sell you a bag of organic lemons. Now imagine that my bag of organic lemons costs 25 times the normal price. They’re very good ***organic*** lemons, I would say, while flashing a Simon Bridges smile. Well-fertilized by a lovely labradoodle called Lexie, I might add.
When confronted with such a scenario, I imagine (hope) that most of you would tell me to stick my organic lemons somewhere nice and dark. Like Norway.
How is this relevant to EVs? Well, the Government has just announced policies to subsidize uptake of electric vehicles (EVs). The Government is subsidizing EVS so as to reduce carbon emissions. A noble objective, you might think. Except for one small problem: My analysis suggests the Government’s is paying 25 times more to reduce emissions via EVs than what it’d cost to reduce emissions via other channels. Put another way, if we took the money being used for EV subsidies and instead used it to offset carbon emissions elsewhere in the economy, then we’d be able to buy 25 times more for our money.
Doesn’t sound like a very good deal does it? Let me first present some numbers to support this conclusion.
First, let’s consider the benefits side of the EV subsidy equation. Information available on the MoT website suggests (from my reading) that the main objective of the Government’s EV subsidies is to reduce emissions from transport. To achieve this outcome, the Government is proposing a suite of measures (subsidies) that are designed to increase the number of EVs on New Zealand roads from approximately 5,000 now to 64,000 in 2021. Of course, under a counter-factual (do-nothing) scenario the number of EVs on NZ roads would also be expected to increase, simply because EV technology is improving over time. For the sake of this analysis let’s say that under the counter-factual scenario (i.e. in the absence of the Government’s subsidies for EVs) we’d see an additional 10,000 EVs on NZ roads. From this we can deduce the Government’s subsidies cause a ***net*** increase of 50,000 EVs.
Second, on the cost side of the equation we find that two of the nine policies are costed at $42 million per annum in 2021. However, we’d expect the cost of the subsidies to start off low and ramp up progressively over the five year period, as more people buy EVs. Let’s assume the subsidies amount to an average of $20 million p.a. over 5 years, or $100 million in total. Let’s also keep things simple and use undiscounted monetary values. To sum up, the Government’s subsidies for EVs amount to spending approximately $100 million over 5 years, which is expected to result in an additional 50,000 EVs on NZ roads. This subsidy can be broken down further: $100 million divided by 50,000 EVs equates to $2,000 per EV, which over five years amounts to $400 per EV per annum. If we further assume an individual EV will be driven an average of 12,000km p.a., then we find the subsidies amount to approximately $0.03 per kilometre travelled.
So what do New Zealand taxpayers get for this investment? Or more specifically, how much of a reduction in CO2 emissions do we get from this investment? The Government’s analysis suggests that EVs will save 0.15 kg CO2 per kilometre traveled compared to a normal car. At 12,000 km p.a. this equates to 1.8 tonnes of CO2 saved per vehicle per annum. If we then apply the current carbon price of NZD $10 per tonne, then we find the Government’s EVs subsidies cost approximately 25 times more per year than the market value of the carbon emissions that they save.
I want to pause for a second to let this sink in: The Government’s EV subsidies cost 25 times more than what it would cost to reduce emissions in other ways. Oh. Dear.
Some of you may argue that a carbon price of NZD $10 per tonne of Co2 is too low – and I’d most definitely agree. Recent research suggests a carbon price closer to $200 per tone would be more accurate. However, I think it’s worth keeping in mind that the current carbon price is the direct consequence of deliberate policy decisions implemented by this Government over the last 8 years. Specifically, the Government has chosen to give out large volumes of free carbon credits, which have suppressed the price of carbon. Hence, I’d argue that the current carbon price at least reflect the Government’s views on how much New Zealanders should be paying to reduce carbon emissions.
Other people who are reading this may be thinking that I simply can’t be right. That somewhere I’ve missed out some zeros, or got a decimal point out of place. Perhaps I’ve been doubling-down on a few too many space-cakes here in Amsterdam, and/or skipped a few too many economics classes.
To try and get an independent perspective on my calculations I undertook some further research into the impact of EV subsidies in other countries. In doing so I stumbled across a very interesting paper titled “The Norwegian support and subsidy policy of electric cars. Should it be adopted by other countries?“, which was published in 2014 in Environmental Science and Policy.
This paper evaluates Norway’s subsidies for EVs and concludes (pg. 167; emphasis added):
Our main conclusion is that the Norwegian EV subsidy policy should be ended as soon as possible, and that this policy certainly should not be implemented by other countries. The solution to the GHG problem of the transportation sector in the next few decades in a world in which the GDP and population growth are the main drivers of the road traffic volume (Bosetti and Longden, 2013) is not to offer subsidies making it cheaper to buy and run EVs, or other alternatives, but to introduce more taxes and restrictions on car use. There are simply too many social costs associated with car transportation (Sterner, 2007). The subsidization idea, which informs so much of environmental policy today, not least within Europe, is ineffective, has several unintended consequences and will in many cases be counterproductive (Helm, 2012). The Norwegian policy for the support of EVs is an example of this.
Under certain reasonable assumptions, we then find that the EV subsidy package that the single EV owner gains amounts to about 13,500 USD/tCO2. As pointed out, this is about 2700 times higher than the current CO2 emission price. Therefore, under similar assumptions, subsidizing 20,000 EVs adds up to the value of more than 50 million permits, or about the present yearly GHG emission in Norway. Rather than supporting EV owners, the Norwegian Government could have bought emission rights in the same amount in the quota market and kept these rights unused, meaning that the quota supply would actually have shrunk. This would have driven the quota price up and possibly contributed to a technology push along different lines. At the same time, this measure would have made Norway ‘carbon neutral’.
It is widely believed that this EV policy will result in less energy consumption based on fossil fuels and a reduction in the local emission and noise problems. However, our discussion and analysis show that unfortunately the issue is not that simple. One of the most worrying aspects of the current EV policy incentives in Norway is that they motivate high-income families to buy a second car. At the moment, two-car households make up a minority. However, if two cars per household become more common, they will pose an environmental challenge across several dimensions and will doubtless mean that the EV policy as a GHG emission reduction instrument is totally missing its point.
“Totally missing its point” is not something you read in academic papers everyday. It’s worth mentioning that political parties in Norway recently reached consensus on rolling back EV subsidies, by removing EVs’ ability to use bus lanes and lifting their exemptions from tolls.
If you’re looking for a sound-bite from this post then this is it: The Government is proposing to spend $100 million to subsidize wealthy households to buy electric cars in order to achieve a relatively paltry reduction in emissions.
At this point I should point out that the Government is not alone in proposing that the New Zealand taxpayers subsidize EVs. The Green Party, for example, has also proposed removing FBT from EVs. While I haven’t evaluated their policy in any detail, on the basis of the numbers I’m seeing here I’d be ***extremely*** skeptical about the effectiveness of such a policy, especially when considered from an environmental and social justice perspective.
To finish, I want to make two moderating comments in relation to my criticisms of EV subsidies.
The first caveat is that I think EV technology is really cool and has a lot of potential to make our lives better. However, observing something is a “cool technology” is not sufficient reason to implement subsidies. Call me square if you will, but I personally believe that good policy should try to 1) achieve its stated outcomes and 2) to do so in an effective manner. Spending $100 million for what appears to be little gain seems to fall outside of this definition of “good policy”..
The second caveat is to acknowledge that EVs have benefits which extend beyond carbon emissions, and include things like air quality and noise benefits. These benefits should definitely be considered as part of a detailed benefit cost analysis. However the onus for demonstrating these benefits, I would argue, lies with the Government / MoT – not some strawberry-blonde punk blogger like myself. Specifically, the Government should really be doing detailed benefit cost analysis before announcing policies. For this reason I think it’s fair for us to evaluate Government policies in terms of their stated objectives.
Notwithstanding these moderating comments, my conclusion is that the Government’s is spending about 25 times more on EVs than they should.
Personally, I feel like this is a shame because I would love to see New Zealand take some serious steps towards reducing carbon emissions. The EV policies announced by the Government, however, do not qualify as a serious step. I’m left with the distinct impression that these EV subsidies are a superficially attractive way (“greenwash”) designed to distract New Zealanders from what is a very real problem: Our carbon footprint is too damned high.