Inconvenient Math for the Electric-Vehicle Revolution

I nconvenient evidence continues to mount against the activists who insist the centrally planned transition to electric vehicles will be a smooth, fuel-efficient, inexpensive ride. Sales and consumer demand are falling behind manufacturers’ expectations. Ford just announced that it is delaying $12 billion in planned investments on EVs and that its $3.1 billion loss in its electric division through three quarters of 2023 already exceeds what it originally projected to lose for the entire year. On top of this, a pair of recent studies lays bare that the ongoing government push for electric vehicles will impose severe costs on taxpayers, with relatively meager environmental benefits.

One study, published by the Fraser Institute, examined the cost of the government subsidies for EV purchases in Canada. The federal government subsidy is up to C$5,000 per vehicle, and six of ten provinces have their own subsidies, which go as high as C$7,000 in Quebec. In their study, authors Jock Finlayson (a Fraser Institute senior fellow and former member of the Board of Directors of the Bank of Canada) and consultant Karen Graham estimate the marginal cost of greenhouse-gas reductions from Canadian EV subsidies ranges from C$355 per ton in provinces where only the federal subsidy is available, to a combined federal and provincial government cost of up to C$857 in Quebec. These estimates are in line with others: A 2020 paper by McGill University economists, citing other research suggesting a C$395 cost per ton of Quebec’s provincial subsidies, concluded the subsidies were “very costly and ineffective” and recommended abolishing them.

Translating the Fraser Institute estimates into USD per ton, this is about $260 to $625, versus the current $51 Biden administration estimate of the social cost of carbon (the estimated harm done by each additional ton of carbon emissions). There are proposals, including from the Environmental Protection Agency, to quadruple the social-cost-of-carbon estimate, based on applying unreasonably low discount rates to future environmental damages and other unrealistic assumptions. But even assuming a much higher amount of damage from carbon emissions than the current $51 estimate — which, in truth, may well be much too high already — the environmental benefits of EV subsidies would still be too low to justify the cost. This is especially so as EV adoption increases: The marginal environmental benefits are diminishing because the minerals used in EV production are not abundant, putting upward pressure on energy consumed in manufacturing.

If subsidizing EV purchases is a bad idea, a reasonable conclusion is that subsidizing their production is unlikely to be much better, and indeed, another Canadian report — this one from the Office of the Parliamentary Budget Officer (PBO), which is a nonpartisan office in the Canadian Parliament — disputes with considerable force the federal government’s claims of the fiscal benefits of its massive subsidies to EV battery plants. Earlier this year, the federal and Ontario provincial governments promised a combined C$28.2 billion in subsidies to Stellantis-LG Energy Solutions and Volkswagen for their EV battery plants. The federal government estimated the subsidy would be so economically beneficial that it would recover the cost of the subsidy through tax revenues within 3.3 years. Nonsense, the PBO report said.

According to the PBO, instead of a 3.3-year break-even period, it will take about 20 years. That earning zero returns over 20 years on an initial outlay of C$28.2 billion is not a sound investment is not a fact that requires an advanced degree in finance to grasp. Taking into account the time value of money by applying a nominal discount rate of 10 percent (the approximate long-run expected return of the stock market) to future cash flows, the subsidies of C$28.2 billion translate into a loss to taxpayers of about C$14 to C$15 billion. There is no breaking even here.

Even this estimate of a C$14 billion to C$15 billion loss is generous. It is far from clear that any tax revenues should be included in such an analysis at all, since in the absence of the subsidized plants there would be some other economic activity in their place to generate tax revenue. Add on the fact that such corporate welfare invariably encourages rent-seeking across the economy instead of productive activity, and the true losses of battery-plant subsidies are yet higher. It is clear that, however the numbers are crunched, the subsidies are a massive loss. Alas, studies demonstrating that subsidizing EV purchases and manufacturing is a money-losing proposition have not generally proven much of a deterrent to the environmental-activist crowd. One reason this may be so is that when it comes to money and EVs, it’s other people’s money they’re losing.