The case not made for electric vehicle subsidy

Dr Bryce Wilkinson
NZ Herald
16 June, 2021

The government’s announcement on Sunday of subsidies for electric vehicles did not make any case that the benefits to the public would plausibly exceed the costs. To fail to demonstrate positive net benefits is to fail to make a public wellbeing case for the measure.

The puzzle is why a government that prides itself on having a wellbeing focus seems to have so little regard for it in this and other cases.

To be clear, I have nothing against the rising ascendancy of electric vehicles. Their growing competitiveness is a technological marvel. The question instead is the government’s rationale for the proposed subsidies.

The government’s Emissions Trading Scheme (ETS) is already a tax on vehicles powered by fossil fuels. To subsidise electric vehicles is to double up on that tax. Surely, either the tax is too low or the subsidy is wrong.

The fact that electric cars are already free-riding on road spending adds weight to the question. Petrol and diesel cars are effectively already subsidising electric vehicles.

The Green Party opposes free-riding elsewhere. That is why it supports the carbon tax that is the ETS. The Party favours public transport, walking and biking. Yet the increased subsidy for electric vehicles is effectively a tax on these alternatives.

The government’s press release covered the absence of a wellbeing benefit case with specious spin. For a start, its claimed environmental benefits are spurious. The ETS caps net emissions. If there are fewer emissions in transport, there will be more emissions elsewhere unless the cap is reduced. The same is true for other ‘chest-beating’ policies such as decarbonising public transport and ‘revitalising rail’. Reducing the cap without subsidising electric vehicles could achieve more while costing less.

The government knows this of course. The press release’s omission is not an oversight. On the contrary, the ETS is at the centre of the government’s policy for achieving net zero carbon emissions by 2050. The press release needed to ignore the ETS because it had to imply that there was no better way of reducing emissions. So, it did. That is spin at work.

On the Climate Change Commission’s analysis, the ETS could come close to achieving the government’s net zero goal at a cost of only $50 a tonne of CO2. Why then did the Commission propose a raft of choice-reducing measures that would cost up to and possibly beyond $250 a tonne?

The Commission’s answer in essence is that we, the public, would cut net emissions in the wrong ways. We would not inflict enough pain on ourselves. We would plant too many pine trees. We would also fail to walk and cycle enough. We would drive cars too much. Government needs to change our behaviour in specific ways.

In so doing, the Commission explicitly abandons achieving net zero carbon by 2050 at least cost, as perceived by those incurring the costs. It seeks to force on New Zealanders an unchanged net emissions result at a higher cost. That harms the public’s wellbeing, as perceived by those affected. It does so for no environmental gain.

While the Commission’s reasons for rejecting the self-assessed wellbeing of New Zealanders as the determining consideration were largely elitist, they did include one telling point. The Zero Carbon Act did not make either the wellbeing of New Zealanders or climate change at least cost the primary consideration. Therefore, the Commission did not need to do so either.

To be clear, the smoking gun here is the Act’s failure to ensure that New Zealanders can use their money to reduce net emissions to the maximum extent. Instead, it allows policies that limit our choices even if they do little to reduce emissions. That provision lacks both a climate change and a wellbeing justification. It is as if the government thinks that it knows best.

The branch of economics that has studied how best to assess whether a policy might improve people’s experienced wellbeing is welfare economics. People’s own assessment of their wellbeing is at the heart of that analysis. That makes it inherently non-elitist.

The contrast is with paternalistic policies that treat people’s preferences as the problem rather than something to be respected. People who have choices will make the ‘wrong’ choices. Instinctively, paternalists wish to reduce the public’s scope for choice. They may want to prohibit what is not mandated. The Commission comes close to both on petrol versus electric cars. The government may have the same instincts.

In the context of assessing policy options, the tool welfare economics offers is benefit-cost analysis. Simple in concept, it is demanding in practice. For a start, the analyst must identify the best alternative option. A policy that is better than the current situation may be worse that the best of the alternatives. It would have a positive net benefit compared to the former and a negative net benefit compared to the latter.

The government’s press release on Sunday is a master class in the use of a false comparison. None of the claimed benefits are benefits relative to the ETS.

To cap it all, a tweet a few days ago by a former senior Labour advisor decried heavy imports of SUVs. With supreme elitism it ended: “It’s surprising we allow this at all.” Well, whose country is it?

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