Electric Vehicles and Government Subsidies

Whenever the question arises of how best to deal with government deficits, businesses and their professional associations often identify subsidies as the place to start. Yet, instead of calling for subsidies to be phased out, they deliberately speak of the need "to put subsidies under greater scrutiny" or "separate the wheat from the chaff." The reason for this is clear. Demanding the elimination of valuable subsidies for one’s own industry is taboo. And it would be hypocritical for one industry to speak out against government subsidies while still supporting them for itself.

The most recent example of industry coveting government largess can be found in the second report of Germany’s National Platform for Electric Mobility (NPE), published in May 2011. After presenting the steps for implementing the organisation’s development plan, the report stresses the necessity of state support. Without government incentives for consumers, the report argues, just under 500,000 electric vehicles will be sold by 2020, roughly half of Germany’s target figure of one million. To increase demand, the NPE recommends tax write-offs for commercial purchases, low-interest loans from KfW Bankengruppe, and yearly tax breaks based on vehicle storage capacity. Furthermore, the NPE recommends that the government cover investment costs for building a system of public charging stations.

In the report’s appendix, the authors go to great lengths to provide an estimate of the overall economic effects of electric vehicles on jobs and revenues from taxes and social insurance. In one scenario – which they believe is realistic – the early subsidy strategy is projected to pay mostly for itself by 2015 and to yield a budget surplus by 2018. The estimates say nothing about potential alternative uses of public funds and the resulting effects on economic vitality. 

Yet the NPE is not the only one making demands on the state. Greed for public monies in other branches is legion, and the arguments are always the same: the proponents of subsidies begin by citing market failure; then they point out distorted competition due to state funding in other industries; next they talk about job creation; and finally they claim that the subsidies are mere incentives and they will pay for themselves in the end. Market failure can indeed justify state intervention. But the government is only obligated to intervene when the private sector is unable to take the necessary measures or when the private sector is likely do a far worse job than the state would. The criteria for market failure are inefficiency, lack of equitability (with regard to distribution), and private sector instability. In the case of the electric vehicle industry, the only criterion that might apply is inefficiency. Market inefficiency can be established in the case of a public good (i.e. non-excludability of use), a natural monopoly (high fixed costs and low marginal costs for manufacture), incomplete information, or externalities. An example of the last criterion is when one company’s production adversely affects the profits of others. If the use of electric vehicles reduces environmental pollution, there’ll be no denying welfare effects.

But even if we accept that the private sector is inefficient, the second criterion for state intervention – i.e. that the government can do it better than the private sector – has yet to be met. Even among the experts, the question of electric vehicles is still somewhat controversial. If companies were convinced of this technology’s viability, they would make the necessary investments on their own accord, particularly since profitability in the automobile industry has never seemed to be much of a problem. Moreover, the state can’t be blamed for any failures on the part of German companies to keep pace with foreign industry when it comes to the development of battery technology.

For these reasons, I would advise against the use of direct state subsidies for electric vehicles but would welcome general tax incentives for private sector expenditures on research and development.