We’ve been pretty tough on the Chevy Volt, GM’s entry into the electric vehicle/hybrid market, over the government subsidies that have been piled onto it for production and sale.  Maybe it’s time to give the government a hearing on the efficacy of the subsidy programs.  Late last week, the CBO analyzed the outcomes of the green-tech subsidy programs aimed at promoting EVs like the Volt, and concluded that they’re not exactly successful.  In fact, the programs have a lot in common with other Barack Obama economic policies — they subsidize sales that would have taken place anyway, and end up with perverse outcomes that actually make the concerns that the programs intended to address worse.

First, are subsidies making EV/hybrids more competitive?  Not even at the massive levels being applied (via Power Line):

At current vehicle and energy prices, the lifetime costs to consumers of an electric vehicle are generally higher than those of a conventional vehicle or traditional hybrid vehicle of similar size and performance, even with the tax credits, which can be as much as $7,500 per vehicle. That conclusion takes into account both the higher purchase price of an electric vehicle and the lower fuel costs over the vehicle’s life. For example, an average plug-in hybrid vehicle with a battery capacity of 16 kilowatt-hours would be eligible for the maximum tax credit. However, that vehicle would require a tax credit of more than $12,000 to have roughly the same lifetime costs as a comparable conventional or traditional hybrid vehicle.

Assuming that everything else is equal, the larger an electric vehicle’s battery capacity, the greater its cost disadvantage relative to conventional vehicles—and thus the larger the tax credit needed to make it cost-competitive.

Yeah, but the subsidies get people who otherwise would not have opted to buy them to change their minds, right?  Er … not exactly:

The direct effect of the credits is to subsidize purchases of electric vehicles—including purchases that would have been made even without the credits.

In other words, the outcome is the same as Cash for Clunkers and the gimmicky homebuyer tax credits in the first two years of the Obama administration.  They aren’t driving demand; they are subsidizing purchases that would have taken place anyway.  None of these programs is doing anything to build demand; it’s just transferring capital from taxpayers to preferred buyers.

But at least the sales reduce pollution.  Or do they?

Those people who purchase electric vehicles because of the tax credit use less gasoline and produce fewer emissions of greenhouse gases than would otherwise be the case. The cost to the government of those reductions in gasoline consumption and emissions can vary widely (see the table below).

However, the tax credits have other, indirect effects: Increased sales of electric vehicles allow automakers to sell more low-fuel-economy vehicles and still comply with the federal standards that govern the average fuel economy of the vehicles they sell (known as CAFE standards). Consequently, the credits will result in little or no reduction in the total gasoline use and greenhouse gas emissions of the nation’s vehicle fleet over the next several years. As a result, the cost per gallon or per metric ton of any such reductions will be much greater than the cost calculated on the basis of the direct effects alone.

As I wrote last week, none of these issues address the core economic problems with EVs and even hybrids:

  • Sustained value — There isn’t any in the Volt. For the sticker price — even with the subsidies — it’s underpowered and undersized compared to the rest of the market.  Thanks to a massive battery replacement cost at somewhere around the 8-year mark, there won’t be any trade-in or resale value for the car, either, which is why lessees are highly unlikely to buy the car from GM at the end of the two-year lease.  Without that battery replacement, the Volt becomes an underpowered, undersized, and overly expensive internal-combustion vehicle.
  • Energy — Much is made of the cleanliness of the plug-in chargeability, especially in ads for the Volt and the Nissan Leaf.  But about half the energy to recharge the battery comes from coal, which is the main contributor to American electrical production.  The internal-combustion engines in most cars are more efficient at using gasoline, with the ability to control emissions better, too.  Thanks to a raft of new EPA regulations on coal, electricity production will be declining since other technologies aren’t ready to take its place in terms of mass-production capability, which means that the lengthy recharge will end up costing consumers more than a trip to the gas station — and that gets more pronounced the more vehicles we move away from gasoline and onto an already-limited electrical grid.
  • Environment — Apart from the concerns above, the manufacture of these batteries — and especially their disposal — will create massive environmental problems.  Rare-earth elements necessary to their production are rare indeed in the US, which means we will have to increase our dependence on Asia for those commodities.  The manufacture of battery arrays is notoriously bad for the environment, and we’re now talking about multiplying the need per car.  Disposal is even worse; it will make the environment more toxic rather than less, and the long-term prospects for manufacturing aren’t good unless we find greater reserves of these elements.

These are among the reasons that Toyota has all but abandoned plans to push an EV for wide distribution:

Toyota Motor Corp has scrapped plans for widespread sales of a new all-electric minicar, saying it had misread the market and the ability of still-emerging battery technology to meet consumer demands.

Toyota, which had already taken a more conservative view of the market for battery-powered cars than rivals General Motors Co and Nissan Motor Co, said it would only sell about 100 battery-powered eQ vehicles in the United States and Japan in an extremely limited release. …

By dropping plans for a second electric vehicle in its line-up, Toyota cast more doubt on an alternative to the combustion engine that has been both lauded for its oil-saving potential and criticised for its heavy reliance on government subsidies in key markets like the United States.

“The current capabilities of electric vehicles do not meet society’s needs, whether it may be the distance the cars can run, or the costs, or how it takes a long time to charge,” said, Uchiyamada, who spearheaded Toyota’s development of the Prius hybrid in the 1990s. …

Pure electric vehicles, like the Nissan Leaf, carry only lithium-ion batteries. Consumer demand for the vehicles has been capped by their limited range and the relatively high cost of the powerful batteries they require.

Even the expansion of hybrid options probably won’t play out well for Toyota; most people will pay for cars with just one engine, not two, and it still leaves car owners the problem of battery exhaustion, disposal, and replacement.

The CBO’s conclusions should be informing public policy.  We should be ending these wasteful subsidies and let consumers make their own choices.  As long as Obama is President, that kind of on-the-job education seems unlikely, and we will end up getting even more Cash for Clunkers solutions that end up costing huge amounts of money and making the problems worse.