Subsidizing Electric Cars Is a Waste of Money

There's no doubt that electric cars are hot. From the beginning of 2012 to the beginning of 2014, the number of them on the road around the world quadrupled from 100,000 to 400,000.

This impressive growth is mostly due to the substantial subsidies offered by various governments, supposedly in an effort to reduce greenhouse gas emissions. The governments of Quebec and Ontario, for instance, have both gotten in on the act for that reason. When you look at the numbers, though, it turns out that subsidizing electric cars is an extremely inefficient way of curbing GHGs. In other words, it costs a lot to reduce a little.

Take Norway, the acknowledged leader in the adoption of electric cars. Like Quebec, Norway produces almost all of its electricity using hydroelectric dams, so the GHG emissions from the electricity used to recharge car batteries are negligible, which is a good thing. Thanks to its extensive subsidy program, the country currently has almost 40,000 electric cars on the road.

But as my MEI colleagues calculated in our most recent publication, the cost of this program has been extremely high. In fact, it has cost the Norwegian government $6,925 per tonne of GHGs avoided. In comparison, the average price of emission quotas in Europe during the first nine months of 2014 was 5.73 euros ($7.84) per tonne. The cost of reducing GHGs by subsidizing electric vehicles is thus 883 times higher than the cost of reducing them through the carbon market!

Things look a little better in Quebec, because in addition to hydropower, Quebecers drive more than Norwegians, and drive heavier vehicles as well. Replacing a conventional car with an electric car therefore avoids more greenhouse gas emissions in Quebec than in Norway.

Still, if Quebec were to ramp up its incentives to levels comparable to those in Norway–which it would have to do in order to reduce emissions by even as little as 1 per cent–it would still cost $1,560 per tonne avoided. This cost is lower than in Norway, but still much higher than the $11.39 price of a tonne of GHG emissions on the Western Climate Initiative carbon market to which Quebec belongs. The cost of reducing GHGs in this way would therefore be "only" 137 times higher than the cost of doing so through the carbon market.

Put another way, the Quebec government could spend $12.1 billion subsidizing the purchase and use of 300,000 electric cars (a target it had initially set for 2020), or it could spend $88 million to buy emission permits and achieve the same level of GHG reductions.

Electric cars may well gain substantial market share as technological improvements make them more efficient and affordable. But in the meantime, if the government is looking for programs to cut, it could start with these wasteful subsidies.

Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this column are his own.

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