Friday, January 28, 2011

What Does $19 Billion Buy?

I see in the Washington Post that two members of Michigan's Congressional delegation have proposed more than doubling the current federal purchase subsidy for electric vehicles to around $19 billion. They would do that by increasing the numbers of vehicles from each manufacturer eligible for the $7,500 EV tax credit from 200,000 to 500,000, over ten years. Although I firmly believe that EVs and other advanced vehicles represent an important and inevitable part of our national energy strategy and future vehicle fleet, it's worth considering what this $19 billion would buy, in terms of the outcomes we really care about. After all, putting EVs on the road is not an end in itself. As the article's title in the print edition suggested, this looks like a pricey plan.

The two main factors behind the government's support for electric vehicles are concerns about energy security and greenhouse gas emissions. At least on these metrics and even with the most optimistic assumptions--that EVs will displace average cars rather than efficient hybrids and that they will be recharged from zero-emission sources of electricity--the $7,500 per car benefit looks expensive. If the average EV were driven 10,000 miles a year for 10 years, which seems reasonable in light of the range limitations of current models and the uncertainty surrounding battery life, then each car would save 4,000 gallons of fuel and avoid CO2 emissions on the order of 40 tons during its life. So from an energy security perspective taxpayers are paying the equivalent of $79 for each barrel of oil saved, or from an emissions perspective $188/ton. The former is nearly the current cost of oil, while the latter is ten times the estimated cost of emissions credits used by supporters of the last unsuccessful cap & trade bill.

Aggregating the oil savings attributable to these EVs over the roughly 2.5 million cars implied by the $19 billion figure gets us to the equivalent of 66,000 barrels per day once they're all on the road. That is only about a tenth of the domestic oil production that the latest industry estimate suggests we stand to lose by 2019 if the implementation of new rules for deepwater drilling results in significant delays in obtaining permits and beginning new deepwater exploration and production projects. I understand that this isn't exactly an apples to oranges comparison, but I have a hard time seeing why the same energy security considerations involved in the current EV push wouldn't apply at least as much to ensuring that the federal offshore permitting process is as streamlined as we can make it, consistent with the complexity and risks of these projects, and that the agency issuing permits has a large enough budget to hire a technically qualified staff sufficient to the task.

To the extent that subsidies are necessary to make today's electric vehicles attractive to ordinary consumers, our elected representatives should be focused on making sure those subsidies are as smart and responsive as possible. Paying the same subsidy as today for an EV produced in 2020, when we are frequently assured that battery and other costs will be much lower, makes no sense and invites inefficiency. Instead of more than doubling subsidies just when the current ones--along with generous manufacturing grants, tax credits, loans and loan guarantees--are succeeding in getting carmakers into the EV game, Congress should now be thinking about how to phase them out. We must avoid creating the kind of subsidy addiction that the ethanol industry has exhibited since its start in the late 1970s. We might have been able to afford that kind of approach once, but no longer, particularly when around 40% of the $19 billion in question here will result in new federal debt.

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