05 January 2011

Electric Vehicle Subsidies - A Good Policy?

Ever since the idea of an initial purchase subsidy for electric vehicles was announced, I have been a proponent of the scheme and claimed that it is an important stepping stone to a much better way of getting around. However, the more I read into the more I become concerned that it is unlikely to be a very effective way of achieving one of the main stated aims, which is to reduce CO2 emissions. Let me explain further.

The Economics

In the UK a new scheme has been introduced as of 1st January 2011 which provides a £5000 subsidy for electric vehicles. The current crop of battery-electric vehicles cost upwards of £25000 whereas the petrol or diesel equivalents are less than £15000. This difference is partly due to the battery which is an expensive component, but also due to a number of other technologies which are not as mature as the internal combustion engine. The fact that these cars are only likely to sell in small volumes is another factor in the elevated purchase price. The £5000 subsidy goes some, but not all of the way towards bringing the prices in line. With the raw costs quoted by the manufacturers the sales volumes would be extremely low without the subsidy, so the subsidy is in many ways an important way of encouraging manufacturers to enter this new and exciting market sector. Similar subsidies exist in many other countries and the overall effect is to make this market sector viable which would probably not be true otherwise. This is very similar to the feed-in tariff for microgeneration of electricity - it supports a market sector that would currently otherwise be unviable, but in a way that aims to bring economies of scale and technological maturity such that they will be viable and self-sustaining in the next few years.

The main benefit to the purchaser of an electric car is the much reduced running cost - 2p per mile for electric, as opposed to 14p per mile for petrol (from the AA and quoted by the guardian http://www.guardian.co.uk/environment/damian-carrington-blog/2011/jan/05/petrol-prices-motorist). If the price differential is 12p per mile then a motorist has to travel 41666 miles, all other things being equal, in order to recover the additional purchase cost. An average motorist will do this distance in approximately 4 years, so based on these figures this looks like quite a good deal. However set against this is the fact that the current generation of vehicles are only capable of distances of around 100 miles before needing to be recharged. The risk of running out of fuel has been an issue since the motor car was invented but as most petrol cars can do more than 500 miles between refuelling, the issue is more acute with electric vehicles. This so-called range anxiety means that people who regularly travel long daily distances will not be buying electric cars. I believe it also means that single car families who own one car and just occasionally do longer distances would be unlikely to buy electric vehicles. By far the most likely purchasers are people who commute significant distances by car but whose return journey is within the range of the battery, or families who own two or more cars and would purchase an electric car as their second car.

Fixed Versus Marginal Costs

This is where I start to have my doubts. When people think about how much it costs per mile to travel by car, they usual think only of the fuel costs. This is by far the largest marginal cost of car travel but there are servicing costs, replacement tyres and other costs to consider as well. The main thing they don't consider are the fixed costs - the purchase cost of the car in the first place, insurance, vehicle excise duty, annual MOT and so forth. What electric cars do at present (with or without the subsidy) is to increase the fixed cost, but reduce the marginal cost. Whether this trade-off is a good thing or not depends on how much mileage you do. If you do high mileage then an electric vehicle is likely to make more economic sense, whereas a low mileage user will be worse off. It is the same effect as buying a Diesel-powered car as opposed to a petrol-powered one, but on a much larger scale - you pay more up front but the running costs are lower.

The Environmental Benefits

Up until now I have been very careful to avoid talking about the environment pros and cons of electric versus petrol cars. There is a lot of information (and an even greater amount of dis-information) on the internet about exactly how 'green' electric cars are.

Many of the concerns are about the chemicals in the batteries. I think it's very clear that, whilst it's not a non-issue, the issue is vastly smaller than those caused by internal combustion engines and their fuels. Electric vehicle batteries mainly contain lithium which is not particularly environmentally problematic although it does make them expensive. Some people have expressed concern about a limited global supply of lithium, but there are vast amounts available in sea water - it just happens currently to be cheaper to dig it out of the ground, and once this resource runs out we will be left with a much larger, but currently more expensive supply. We will either have to live with this more expensive supply or possibly someone will come up with a much cheaper means of extracting it from sea water. Either way, it will not run out quickly.

The other main concern, which I share, is about how the electricity is generated. Most journalists take a look at the UK electricity generation mix as a whole and assume that this proportion will apply to the electricity used to charge electric vehicles. However, one of the main benefits of electric vehicles is that they can be charged at night, therefore taking up 'slack' capacity that would otherwise go unused. This makes a huge amount of sense from a grid perspective, and will help to reduce the overall costs. However much of this slack capacity is take up by gas and coal generation which is fairly carbon-intensive. So every kWh added to the nighttime load is likely to be met by burning another 2.5kWh of coal or 2kWh of gas. This means that electric vehicles on the current grid will be effectively powered by our most polluting forms of generation. As the proportion of electricity generated by photovoltaics increases this problem will only get worse as this generation capacity goes offline at night.

My feeling about whether electric vehicles are better or worse than petrol vehicles (from a CO2 perspective) is that they are in fact better by a significant amount, but not as much as many people would have you believe. In fact, I doubt they currently do much better than the latest efficient diesel-powered cars, which are vastly cheaper to purchase. Of course the main promise of electric vehicles is that the grid will gradually increase the proportion generated by renewables, and the most polluting forms will form a diminishing proportion of the mix.

Jevons Paradox Applied to Travel

Let us take a look back at the cost per mile issue. Jevons paradox was originally applied to the use of coal in the early days of the industrial revolution, and made the observation that increasing efficiency in how coal was used didn't lead to an overall decline in how coal was used. Because coal used more efficiently, it this became viable to use it in more situations, and hence the total size of the coal-using industries increased such that the total usage actually increased.

Applying that to car travel, we see that currently one of the biggest disincentives for people to travel by car is the perceived cost per mile. At 14p per mile, a journey of 60 miles (say a return trip from Cambridge to Peterborough) would cost £8.40. Whilst most car owners could easily afford this, they would certainly not want to make this journey all the time unless it was financially beneficial in other ways. However, at 2p per mile this journey would cost a mere £1.20 - an amount far less likely to figure as significant in people's thinking. The outcome of this is that people are far more likely to make journeys of this length if the cost is low. So by increasing the cost efficiency with which people can make a journey, the chances are that they will make far more journeys. In the absence of any other factors coming in to play, it's even conceivable that the total money spent on making journeys could increase, as the main constraint (cost) to making the journey is relaxed. This would be Jevons paradox applied to travel. In reality, however, cost isn't the only constraint present and some of the other constraints are likely to come into play long before this point is reached. The main other constraints in this case are time and traffic congestion. As people travel more and more both of these constraints will become worse as the road network grinds to a horrible, congested gridlock of silent clean electric vehicles.

So from this it seems to me that the main effect of a transition to electric cars is to reduce the cost of motoring but to increase the time it takes to travel and to increase the levels of congestion on the roads, with a potential future reduction in associated CO2 emissions. This doesn't sound quite like the world I would like to live in.

A Better Alternative

Despite my misgivings about the current economics of the electric vehicle subsidy, I do think it could have been applied with some specific changes that would make it far more effective without as much of a downside.

Firstly, if it were only applied to commercial vehicles and not personal vehicles it could have a significant effect on pollution levels in cities, where particulate pollution from diesel engines is a significant problem. Many commercial vehicles only cover a limited daily mileage so the reduced range would not be a problem. With a reduced size of market the subsidy per vehicle could be significantly more than £5000 at the start.

Secondly, it could have been applied far more widely to electric scooters and electrically-assisted bicycles. The subsidy per vehicle would be a lot less and it could help far more people. It would also persuade many people who drive a 5-person car to work at 20% capacity (causing congestion and pollution as a result) to switch to a much cheaper, and ultimately less problematic mode of transport. As many motorcycles have a much smaller range than cars, a switch to electric propulsion is much less problematic.

Thirdly, the subsidy is a flat amount with an upper limit on how many vehicles it can be applied to. A much better approach would be to model it on the microgeneration feed-in tariffs. These start off very generous in order to encourage growth and maturity in the industry, but then decrease at a well-published rate. This has the effect of encouraging people to 'get in early' before the subsidy level reduces, and gives suppliers a strong incentive to reduce their manufacturing costs over time.

Fourthly it could have been made dependent upon the user getting their electricity supply from renewable resources, thus increasing the demand for this electricity. This could have been administered via the renewable suppliers such that the user is contractually obliged to stay renewable for, say, 5 years or else the subsidy becomes repayable. The contract for this would need to change ownership with the car, and would therefore have a significant effect on the resale value of vehicles.

By focussing the funds on the commercial vehicle and electric scooter/electrically assisted bicycle sectors, they are still supporting an emerging market sector which has the potential to reduce CO2 emissions very significantly. In the second case, it would cause a direct reduction in emissions as people switched away from petrol cars. In both cases it would support economies of scale in the manufacture of electric vehicles, and the maturing of various technologies involved. To me, it seems this would have been a much better way of spending my money (via the public purse) in the support of battery-electric vehicles. The third and fourth points would accelerate the rate at which the intended effect of reducing CO2 emissions took place.

In summary, I think the scheme represents a massive missed opportunity. As such, I have come to the conclusion that it is not an effective use of taxpayers' money.

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