Subsidy-Powered Vehicles

August 21, 2012

Since Thomas Edison invented the modern electric system, engineers have attempted to create an electric car that consumers could afford. This proved to be an elusive task, as many times it seemed that an electric car had been achieved, only to fail when introduced into the market, says Kenneth P. Green, a resident scholar at the American Enterprise Institute.

The government has pumped subsidies to try and create both the supply and demand for electric cars. For example, the federal government created a tax credit and updated it in the American Recovery and Reinvestment Act of 2009 for electric or partially electric vehicles. However, tax credits, on top of other direct or indirect subsidies, have failed to make electric cars competitive.

California has been a major player in the electric car market and is an example of how government intervention fails.

  • California mandated the sale of zero-emission vehicles (ZEVs) in 1990.
  • This meant that 2 percent of vehicles sold in the state had to be all electric by 1998; this increased to 10 percent by 2001.
  • The costs of producing ZEVs were spread across the car market, and auto producers were forced to increase the cost of their electric and non-electric vehicles to make up for the costs of making ZEVs.
  • This led to consumers keeping their older cars because they could not afford newer ones, which in turn meant that they were still emitting high levels of carbon dioxide.

The failures of California have not extinguished the desire of policymakers to continue providing subsidies to companies and the public to create and purchase an electric car. Subsidies by their very nature force an uncompetitive good into the market.

For example, the cost of an electric car, such as a Chevy Volt, hovers around $40,000 while its counterpart, the Chevy Cruze, costs about $16,800. Even if a consumer were able to afford this, the price of the electric car would be reflected in the cost of insurance to cover the car. It is about $250 more to insure a Chevy Volt than the Chevy Cruze. This is because the electric cars have more expensive parts and requires specialized labor. Most consumers would rather buy the cheaper car and pay less in insurance, making electric cars uncompetitive and government subsidies a failure.

Source: Kenneth P. Green, "Subsidy-Powered Vehicles," The American, August 13, 2012.

 

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