Buying an electric car, saving the planet? not exactly

Suspension

It is good to see legislative progress in addressing the effects of climate change, as reflected in the deal announced last week between Senator Joe Manchin and Majority Leader Chuck Schumer. But the proposal falls short in some ways. In particular, subsidies for the purchase of electric cars may not be the best way to tackle global climate change.

The invoice sets a maximum tax credit of $7,500 for a new electric vehicle, extended from the status quo, and a new $4,000 credit for the purchase of a used car.

The first problem should be clear from recent experience with stimulus and the resulting higher rates of inflation: When you give consumers money, it sometimes leads to higher prices. The danger is that these subsidies will lead to more electric cars, not more electric cars.

Currently, the electric vehicle market is hitting some supply-side constraints. If you order a Tesla now, for example, you may have to wait months. Ford and General Motors produce electric cars, but this is not the main focus of their production. On a macro level, the world does not have enough battery capacity to succeed in the mass transition to electric vehicles.

An alternative approach may focus on the supply side rather than the demand side. If policy can make electric car batteries cheaper, more efficient, and available, electric car prices will fall and consumers will buy more of them. Moreover, the effects will be global, rather than limited to the United States.

Of course, the increased demand for electric cars can help reduce battery prices and increase supply. But the simplest and perhaps most likely outcome is that in the short term, electric vehicle prices and costs will rise. American consumers will shy away from scarce inputs from the rest of the world. There are long lead times for creating new sources of lithium, and subsidies that won’t last forever (by law, it will end in 2032) may not be enough to give the needed boost. Supporting new technologies to obtain lithium may be a better strategy.

Another driver of electric vehicle support may be to increase demand, encourage production, and incentivize car companies to find ways to reduce costs. It may happen, but note that a country where unit costs fall rapidly in a particular sector is a country with a small number of dominant suppliers, perhaps only one or two. (The firm that produces the most will end up with the lowest costs and maintain a strong market position.) If the electric vehicle market is somewhat monopolized, more of the subsidy benefits will go to businesses than to customers.

I am not bothered by this result myself. But this is not how politics is advertised. And if companies reap most of the benefits in the form of higher profits, electric cars may not be very popular.

The bill also contains commercial elements, which are not ideal from a climate point of view. Subsidies only apply to North American vehicles, and battery components must increasingly be American over time, and do not allow Chinese components. So, as effective as the policy is, it will attract the market in the direction of American products.

This is not a surprising feature of US legislation. However, US producers may not be in the best position to solve the problem of affordable and scalable electric cars. Is it smart to push critical growth in electric car production into a relatively high-wage market?

Some commentators have suggested that Korean car manufacturers Hyundai and Kia will be leaders in the production of electric cars. But they may see their biggest innovations and productivity gains outside North America, perhaps in Europe or India.

Keep in mind that climate change is a global problem; Reducing US emissions would only do so much. This legislation could lower emissions in the United States but make them marginally more difficult to achieve in the rest of the world, thus reducing its effectiveness.

It’s no secret that US legislation has provisions that support US consumers and businesses. But political expediency is an explanation, not an excuse. Climate change is a global problem that requires global solutions.

More from Bloomberg Opinion:

• Mansion’s makeover gives clean tech a jolt: Liam Denning

• Why are electric cars getting bigger and heavier?: Chris Bryant

• Does anyone actually make electric vehicles?: Anjani Trivedi

This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.

Tyler Coen is a columnist for the Bloomberg Opinion. He is professor of economics at George Mason University and writes for the blog Marginal Revolution. Co-author of Talent: How to Recognize Power Factors, Creators, and Winners Around the World.

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