Chicken and egg problem of EVs

Dr Eric Crampton
22 June, 2021

This week, a strong majority of Australian economists came out in support of a policy measure to encourage electric vehicle adoption on their side of the Tasman.

But they did not support subsidies for electric vehicles.

Instead, the panel of economists polled by the Economic Society wanted to be sure there were enough public charging points for EVs.

Of the 62 economists polled, 43, or just under 70%, supported subsidising public charging points.

Other policies frequently recommended in New Zealand enjoyed less support.

Setting a date for ending the import of petrol and diesel cars, which has been recommended by the Climate Commission, earned the support of just under a third of Australian economists.

Subsidising basic electric vehicles, the policy announced last week by the New Zealand government, enjoyed the support of less than a quarter of the surveyed economists. And just under 15% supported subsidising electric vehicles more broadly, including more expensive models.

The surveyed economists did like the idea of removing Australia’s luxury car tax from electric vehicles. One of the surveyed supporters, the University of New South Wales’s Professor Richard Holden, said that doing so is a “no-brainer. It’s a profoundly silly tax in any case.”

Fortunately, New Zealand has no comparable tax in need of abolition.

And while the survey did not ask about carbon pricing, many of the surveyed economists nevertheless expressed frustration about the lack of a carbon price in Australia. Applied Economics’s Peter Abelson noted the preferability of taxing carbon emissions rather than subsidising one of many possible ways of reducing emissions. Others made similar suggestions.  

Fortunately, carbon already carries a price in New Zealand – about $40 per tonne emitted currently, for sectors covered by the Emissions Trading Scheme.

Economists differ a bit from other climate advocates and policy analysts in how they think about climate policy problems. In general, economists try to work each problem back to an underlying market failure and address each market failure with its own policy.

Economist Tim Harford likens the approach to keyhole surgery. It allows the surgeon, or the policy analyst, to avoid making large incisions with more substantial risks of complications and side effects.

When carbon emissions do not face a price, emitters are not confronted with the cost of their emissions to the global community. They then emit more than they should, to the world’s detriment. So, economists support carbon pricing, whether through a carbon tax or through an Emissions Trading Scheme like New Zealand’s.

But economists also support additional measures when there is some additional problem in the system, and when the proposed solution stacks up.

The Australian economists supported ensuring sufficient charge points for electric vehicles because there is a potential real market failure.

If people avoid buying EVs for want of charging stations, and if companies avoid installing networks of charging stations because few people have EVs, it can be needlessly difficult for people to switch to EVs even when doing so might otherwise make sense for them. Government subsidising the installation of charging facilities in important places where they are scarce, during the early phases of EV adoption, can help break that potential cycle.

As the University of New South Wales’s Professor Gigi Foster put it, “it’s sort of like a chicken and egg problem where the government can help by buying the chicken.”

In that case, the point of the policy is not to hit any particular target for EV uptake, or to encourage EVs explicitly. Rather, it is to ease a potentially real market failure that might stand in the way of EV adoption as carbon prices rise and as more people find EVs to be attractive.

Professor Foster also warned that subsidising specific goods, like EVs, or implementing bans like the proposed ban on petrol vehicle imports, is generally worse than adjusting incentives more broadly by correcting market failures.

The difference in approach matters.

If we begin by identifying specific market failures and looking for the best solution to each of them in turn, that can yield substantially different and better answers than if we begin with a proposed policy, like subsidising electric vehicles, and look for market failures that might justify subsidising them.

For example, while shifts to EVs would result in improvements in local air quality in places less windy than Wellington, there could be other policies that would be more cost-effective toward that end. And the government’s proposed feebate scheme, which would tax the import of higher carbon-emitting vehicles, risks discouraging owners of older and dirtier utes from upgrading to newer, cleaner, comparable models because of the cost increase.

This week, Newsroom’s Marc Daalder provided an excellent précis of the arguments on either side. Minister for Climate Change James Shaw characterised arguments favouring ETS-led approaches as economically ‘purist’ and noted the world doesn’t work that way.

But it is the complexity of the real world that makes the best case for trying to do as much as possible through the Emissions Trading Scheme, reducing the ETS cap on net emissions on New Zealand’s path to net zero, and letting rising carbon prices.

In a simple world, it would be easy to tell who should drive which vehicles, or to draw lines between appropriate uses of vehicles and inappropriate ones. In the real world, it is impossible for anyone at a desk in Wellington to make those kinds of choices for others without doing real harm.

Stay in the loop: Subscribe to updates