The Ambiguous Power of a Free Ride
The new Tesla Model 3 release sheds light on how consumer subsidies can drive EV up-take. But there’s a line between smart incentives and free rides. The trick is finding it.
By Will Scott
This week Tesla unveiled the new Model 3 electric vehicle (EV) to throngs of people waiting in line to pay their US$ 1,000 deposit and get on the waiting list for when the vehicle is expected to roll into driveways at the end of 2017. With a battery range of approximately 320km and a price tag of US$ 35,000 falling to US$ 27,500 after tax credits from the US Federal Government, the Model 3 allows the luxury EV company to compete with the Chevy Bolt and Nissan Leaf in the sub-$30,000 EV market. The growing cadre of reasonably priced EVs available to consumers showcases how rapid technological advances are leading to price reductions, making EV ownership more attainable than ever before.
Tesla’s huge splash in the pool of affordable EVs warrants a closer look at the role of consumer subsidies in the up-take of electric vehicles.
Consumer subsidies can play an important role in the adoption of new technologies. Since 2010, the number of electric vehicles on the road has increased over eight-fold thanks in part to the subsidies stimulating demand. However EVs still represent less than 1% of new car sales. The price of the lithium ion batteries at the heart of the battery EVs has fallen by 65% since 2010. With these trends continuing, Bloomberg New Energy Finance predicts electric vehicles to reach unsubsidized cost competitiveness with their gasoline fuelled peers by 2022, increasing the adoption rate and leading to 25% of total market share by 2040.
Number of EVs on the road has increased 8 fold since 2010. They’re expected to make up 25% of total market share by 2040.
The current tax-credit offers US$ 7,500 extending to the first 200,000 EV models a manufacturer produces, and may not last long by the time the Model 3 enters production thanks to current demand for the higher-end Models S and X. After a manufacturer hits the 200,000 units sold mark, the tax-credit begins phasing out by halving to US$3,250 for six months before falling to US$ 1,125 and ending six months later. The phase-out is intended to keep pressure on manufacturers to reduce costs over time and become independently competitive.
The fact is, when it comes to scaling up new technology in an economically smart way: consumer subsidies can be harmful. If poorly targeted they can encourage environmentally damaging activities, and keeping them in place for too long can lead to lock-in and distort the price signals of the market. Moreover, when the impact of the subsidy fails to change consumer behaviour for the better, it is simply a waste of money.
For example, when subsidies target people who would have done an environmentally friendly behaviour anyways, these individuals can be considered “free riders”.
This might be the case for the US$ 7,500 tax subsidy being used on the purchase of a Model S at an average sale price of nearly US$ 105,000, or the more expensive Model X. Consumers purchasing luxury electric cars may be less influenced by the availability of subsidy support than consumers shopping in the US$ 30,000 range, with the subsidy reducing the price of the Model 3 by over 20%. In contrast, Ontario sets the incentive value based on the model of the car and the purchase or lease term, offering CAD$ 3,000 for the purchase of a Tesla Model S or X.
A number of factors come into play beyond the up-front cost of the vehicle when promoting the uptake of EVs, such as future operating costs and the availability of EV charging stations.
Some suggest that underinvestment in EV charging stations is holding back EV uptake and subsidies would be better spent on reducing those costs. EV charging infrastructure presents the classic ‘chicken and egg’ scenario: without a large EV market, investors are reluctant to build the required infrastructure, while the lack of infrastructure can dissuade consumers from buying EVs.
Complementary policy actions are also important to support the uptake of EVs. These may include pricing pollution, accelerating clean innovation, and investing in infrastructure — 3 of Smart Prosperity’s Big Ideas. For example, a price on carbon emissions, reflected in the price of gas at the pump, will enhance the overall price competitiveness of driving an EV. Likewise, supporting innovation will continue to drive down the costs of EV components, and early investment by governments and public-private partnerships in EV charging networks can increase the convenience of owning an EV.
As we transition toward a more sustainable economy, successfully bringing innovative clean-tech solutions to scale will play a key role. Consumer subsidies can be an important and useful tool within the suite of policies options available, but the details of the design are essential to efficiently achieving the desired results.
