Setting electric car sales quotas is bad policy

This weekend, Montreal will host the Formula E tournament, which is an electric-car version of the Grand Prix. This event is a sign of the growing popularity of electric vehicles, but the provincial government is impatient for more consumers to get on board. In addition to existing purchase subsidies, Quebec is now imposing a de facto tax on conventional vehicles in order to promote electric cars.

That tax is part of the government’s plan to reach its much-vaunted goal of having an electric vehicle fleet of 100,000 by 2020. But if electric vehicle subsidies are the carrot, sales quotas are the stick, increasing the cost of conventional vehicles by $175 in 2018, and by $1,100 in 2025.

Under the government’s new program, each electric vehicle sold will earn carmakers up to four credits, depending on the features of the vehicle. Carmakers will be required to sell a certain proportion of electric and hybrid vehicles: The number of credits earned will have to be at least a specified percentage of the number of conventional cars sold.

At the end of the year, if a carmaker has not met its quota, it will have to buy the missing credits from other carmakers that have been able to meet it, or buy them directly from the government.

The quotas for 2018 are set at 3.5 per cent of sales, but this will increase gradually to 22 per cent by 2025. These proportions are staggeringly high given that electric car sales are currently below 0.5 per cent of all car sales, while combined hybrid and electric car sales are slightly above 1 per cent. Most carmakers are therefore not compliant with the policy.

Here’s where the tax comes in, since all non-compliant manufacturers will have to pay $5,000 per missing credit. It is not called a tax, but for an economist, that’s what it is.

Consider the following example applicable to the 2018 model year, when the quota amount will be 3.5 per cent. A producer who falls short but decides to produce 100 additional conventional vehicles will have to acquire an additional 3.5 credits, and the extra cost for these 100 vehicles will be $175 per vehicle. By 2025, when the quota reaches 22 per cent, that extra cost to a carmaker will stand at $1,100 per conventional car. How can one not call this a tax?

Since it increases costs for carmakers, the credits will exert upward pressure on prices, which means that consumers will have to pay more. Furthermore, lower-income households are likely to be more affected. Indeed, although the extra cost applies equally to all conventional vehicles, this means that relatively speaking, it will increase the price of less expensive vehicles more than it will increase the price of higher-end vehicles.

In addition, by evenly hiking the price of all conventional vehicles, the government is changing the affordability of light trucks relative to passenger cars. While overall sales can be expected to fall as a result of higher costs, the proportion of light trucks will increase. Since light trucks are more polluting, the government is basically incentivizing the acquisition of conventional vehicles that are less fuel-efficient.

All of this is done to stimulate electric car sales, which is one of the least efficient ways to reduce greenhouse gas emissions. Presently, subsidies to electric cars in Quebec reduce emissions at a cost of $288 per tonne — roughly 16 to 29 times more than existing alternatives.

In fact, the new sales quota program not only taxes conventional cars; it also subsidizes manufacturers that produce nothing but electric cars, as they will rack up credits that may amount to as much as $20,000 per vehicle. This means that the government is simply heaping more taxpayer funds upon a demonstrated policy failure.

Given these serious shortcomings, the Quebec government should think again and abandon these draconian and expensive measures for promoting the electrification of the province’s vehicle fleet.

Germain Belzile is a Senior Associate Researcher at the MEI and the author of “Electric Vehicle Sales Quotas: A Tax in Disguise.” The views reflected in this op-ed are his own.