Why must taxpayers subsidise cars for rich greens?

John Kane-Berman says the electric-vehicle "market" is a state fostered one

Elon Musk is now supposedly the richest man in the world. Although he is the market leader, he is not the only manufacturer of electric cars, nor is that his only line of business. But it would be interesting to know how much of his wealth is due to regulatory requirements, subsidies for electric cars, and proposed bans on other types of vehicles. If governments weren’t pushing some of his products and undermining competing products, would he perhaps be a bit poorer?

If you buy into Mr Musk are you also buying into the promises of the British prime minister, Boris Johnson, to ban the sale of new internal combustion engines from 2030? Are you further buying into the expectation that the new American president, Joe Biden, will step up demands for more and more vehicles to be powered by electricity?

Are you banking on similar demands being made by governments belonging to the European Union (EU)? Some of these have indeed already promised to phase out traditional engines. Are you assuming that United Nations officials will chivvy more and more governments to promote electric cars as one means of combating the “climate emergency” that is said to be threatening Planet Earth?

According to a study published in 2017 by Strata, a policy research group, American subsidies for electric vehicles (EVs) at federal, state, and local level could end up costing between $15 billion and $20 billion. Some were targeted at consumers, others at producers, while EV infrastructure was also subsidised. Last year one of Mr Musk’s colleagues conceded that much of the company’s success was due to its regulatory credits business.

According to the Economist Intelligence Unit, “generous incentives and subsidies on offer in the EU” will push up the EU’s share of the global EV market from 22% in 2019 to 31% in 2021, partly because Chinese subsidies for EVs are slowly being cut. In Germany EV buyers will get 9 000 Euros towards their car this year, benefiting BMW and Volkswagen as well as Mr Musk’s Tesla vehicles. France will pay 6 000 Euros.

The British government will not only give grants to EV buyers, but also invest in charging points and battery “gigafactories”. It may have to do so on a massive scale, since the scarcity of charging infrastructure and the high cost of installing it are holding back demand for EVs, which currently account for only 5% of vehicle sales in the United Kingdom.

A McKinsey study cited by the Wall Street Journal last year estimated that EVs carried a price premium of $12 000 over cars with other engines, the cost of batteries being the biggest problem. According to a recent Bloomberg report, “EVs are still years away from reaching price parity with the gas and diesel cars consumers are used to.” The implication is that subsidies will have to continue for years to come.  

This whole story is extraordinary. The Economist wrote in October that “if electric vehicles were in every way as satisfactory as alternatives, it would take little or no policy incentive to flip the market from petrol-powered cars to electric ones”. And in November an article in Forbes observed that “under current regulations automakers are pushed to produce more EVs than there is demand for”.

In other words, the EV “market” is not a natural market, but one created and fostered by governments. No doubt some of those who purchase EVs are wealthy enough to do so without subsidies. But most buyers seem to be willing to buy them only if they get subsidies.  

The costs of subsidies and other incentives to buy electric cars are of course spread across all taxpayers. As Strata observed, “Electric vehicle subsidies are highly regressive, even when compared with other clean energy subsidies. The benefits of this subsidy are concentrated among those who have high incomes, while the costs are dispersed among all taxpayers.”

Moreover, as the Forbes article argued, “whatever your position on subsidies in general, it’s hard to make the case that taxpayers should foot the bill to produce luxury cars marketed to the wealthiest Americans”.

According to Moneyweb, electric cars in South Africa are around R200 000 more expensive than comparable cars with internal combustion engines. Electric cars also attract higher import duties than cars with petrol or diesel engines. Without government incentives, the market for EVs in South Africa is likely to remain small.

But it would be unconscionable to subsidise their purchase when the vast majority of South Africans cannot afford even cheap entry-level vehicles.        

* John Kane-Berman is a policy fellow at the IRR, a think-tank that promotes political and economic freedom. Readers are invited to take a stand with the IRR by clicking here or sending an SMS with your name to 32823. Each SMS costs R1. Ts and Cs apply.