Can cleantech incentives be too successful?
This is a question that Norway is grappling with as the country considers dropping its generous electric vehicle (EV) subsidies. EV drivers in the county receive a number of benefits, including free parking and bus lane access, but the biggest by far are the tax exemptions. Since taxes in Norway can double the price of a conventional car, an EV without sales tax suddenly becomes much more affordable. One study estimated that total subsidies for EVs in Norway equated to around $8,200 per car per year. And they’ve worked. Norway has the highest EV adoption rate in the world. Navigant Research has estimated that battery electric vehicles were around 13% of the country’s annual light duty vehicle sales in 2014.
Evidence suggests these incentives are important drivers in other markets, as well. In the United States, HOV lane access has been strongly correlated to demand for hybrids and EVs in markets like the Washington, D.C. area and California, where traffic delays are legendary. Georgia has seen a significant uptick in EV sales since implementing an EV tax break—one that the state is now considering ending.
One complaint made against these incentives is that they are essentially subsidizing the rich, or at least the well-off. And there is some truth to this. A $100,000 Tesla S is certainly a car out of reach for most households. Even mainstream EVs like the Nissan LEAF, while affordable, represents a significant premium over the price of a comparable car. The same complaint can be made for most clean energy subsidies, whether for solar, wind, or fuel cells: initial adoption is likely in the higher income brackets.
Why Governments Still See Subsidies as Useful
However, subsidies are very often the carrot to the government stick of regulatory mandates. In the United States, automakers are facing increasingly tough fuel economy and greenhouse gas emissions targets. By model year 2025, passenger vehicles in the United States will be required to meet an estimated combined average fuel economy of 54.5 mpg. As Navigant Research found in its Automotive Fuel Efficiency Technologies report, these standards cannot be fully met simply by the downsizing of internal combustion engines and the introduction of stop-start or hybrid capability. EV sales will be a necessary component to meeting these standards. Add to this the zero emissions vehicle mandates set by California and adopted by 9 other states, and the government is in essence requiring the sale of EVs.
EV sales have seen steady growth since 2010, and are poised to see faster growth. However, even with the introduction of more models, they will still be offered a price premium that will keep them at a niche sales level. In its Electric Vehicle Market Forecasts report, Navigant Research projected global PEV sales would rise from under 2% of annual light duty vehicle sales in major markets like North America and Western Europe to around 4-5% in 2023.
Even with cheaper and longer range EVs coming to market, the price premium can keep these cars from reaching the sales level needed to meet these standards without some incentives; these will continue to be necessary for the next decade.
Tags: Electric Vehicles, Government Incentives, Policy & Regulation, Transportation Efficiencies
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