Earlier this week, President Trump threatened to take away General Motors’ subsidies for electric cars in retaliation for its recently announced plan to shutter five plants and lay off 15 percent of its workforce. The threat has alarmed not just GM but other companies that produce electric vehicles, as well as those who believe reducing carbon emissions is an imperative.
While it is never a good thing to have economic policy determined by spite, it is worth acknowledging that giving rich people explicit subsidies to buy Teslas in no way is a cost-effective way to arrest carbon emissions, and renewing this policy makes little sense. Any successful effort to slow the growth of carbon emissions must go beyond incentivizing specific industries and groups of consumers and provide economy-wide incentives.
{mosads}For the past few years, the government has provided a $7,500 tax credit to anyone who buys an all-electric car, with a cap of 200,000 per manufacturer. This provision expires at the end of the year. Congress is considering extending this tax break, and next week will debate the inclusion of an extension in a year-end tax package.
The ostensible justification for enacting this tax break in the first place was to help the nascent electric car industry to continue developing within the United States. Other countries — most notably China — provide hefty subsidies to their electric car industry, and the fear was that the U.S. auto industry was at risk of falling behind its foreign competition.
That is a harder argument to make today. Tesla, the domestic leader in electric car production, is not only profitable but its production will be well above the tax credit cap of 200,000 vehicles this year.
All of the major automobile companies are pouring billions of dollars into the development of electric cars, and several major technology firms such as Apple, Uber and Dyson — the vacuum cleaner maker — also are investing heavily to develop electric cars.
It is hard to argue that these investments would go away if we reduced or eliminated the tax credit — several of these companies are years away from producing an automobile. Production and sales of electric vehicles went up smartly in 2017 and are poised to do so again. As their quality and range improves, and their price premium above gasoline-powered cars declines, consumers are becoming increasingly enamored with them. It’s difficult to find a reason why that would end if the subsidy disappeared.
It also is not clear that electric vehicles are an effective way to reduce carbon emissions, which is the ostensible justification given by many supporters to extend this subsidy.
While Tesla, the recently-killed Chevy Volt, and other cars that run entirely on batteries do not directly emit CO2, they get their power from stationary power plants that do emit greenhouse gases, depending upon their source of energy. A Tesla owned by a driver in a community where coal plants provide much of the electric power does not produce appreciably less carbon than a new fuel-efficient internal combustion car. There are a myriad of ways we could spend the money allocated to electric car tax credits and achieve much greater carbon emissions. The simplest, and most effective, way to address this problem would be with a carbon tax.
Providing hefty tax credits to people — mainly wealthy ones, at that — who buy electric cars achieves little, if any, reduction in carbon emissions at a hefty cost, while injecting needless complexity and income inequality into the tax code. Every tax incentive, regulation and legislation enacted to reduce carbon emissions — or achieve any other policy goal, for that matter — needs to stand on its own and provide benefits that exceed the costs of enactment. It is hard to conceive that tax credits for electric vehicles currently do so.
Ike Brannon is a senior fellow at the Jack Kemp Foundation, a nonprofit charitable organization committed to advancing growth, freedom, democracy and hope.