President Obama's electric car subsidies are snobby and foolish.

Commentary about business and finance.
July 30 2010 9:51 AM

Unaffordable at Any Speed

President Obama's electric car subsidies are snobby and foolish.

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It's doubtful that the government's electric-car push can "create" net jobs, as opposed to moving them around within the economy. Absent robust consumer demand, of course, the new production facilities will go idle and lose money. That is all too likely, because the Obama administration is hardly the only government that's jumped on the electric-car bandwagon. Bloated by subsidies, global battery production capacity far exceeds demand, present and projected, with the biggest excesses forecast for Japan and the United States, according to a study on the possible battery "bubble" by Roland Berger Strategy Consultants. The shakeout should begin within five years, the firm says. And when it does, factory workers in Michigan will be back out on the street—unless their companies successfully lobby for a federal bailout.

As for greenhouse-gas, or GHG, emissions: The carbon-reduction impact of electric vehicles is notoriously difficult to calculate. The ultimate source of their power could be a hydroelectric dam or a carbon-belching coal-fired plant. Several studies have found, however, that introduction of plug-in hybrids and all-electric vehicles will probably not reduce overall U.S. fuel consumption in the short run, and may even increase it slightly. A report by Harvard University's Belfer Center for Science and International Affairs found that "strong income tax credits for the purchase of new diesel, hybrid and plug-in hybrid vehicles are essentially ineffective at reducing GHG emissions from transportation."

Why? Under federal Corporate Average Fuel Efficiency standards, carmakers can use the high fuel efficiency ratings of a few electric models to offset slower improvement in the rest of their fleets. In other words, the electrics clear the way for SUVs. The opportunity to game the Corporate Average Fuel Efficiency system—and California's zero-emissions vehicle targets—helps explain why car companies take advanced-vehicle subsidies in the first place.

Electric car. Click image to expand.
Electric car

If the federal government wanted to dent carbon emissions and gasoline consumption without subsidizing a handful of rich consumers and client corporations, it would accept that the internal combustion engine is going to be the dominant technology for decades to come—and focus on getting more mileage out of it.

The Obama administration's toughened Corporate Average Fuel Efficiency standards may help in that regard, though they are suboptimal compared with higher gas taxes, which the president—like almost all other politicians—is loath to discuss. At MIT, a team led by engine expert John Heywood has recommended a gradual increase in the gasoline tax, phased in over years and rebated to low-income households, coupled with a system under which consumers would receive a per-MPG bonus every time they traded up from a less fuel-efficient car to a more fuel-efficient one—and a penalty every time they traded down.

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Such measures might not lead to ribbon-cutting ceremonies in Michigan. And they might not increase the number of Volts, Leafs, and other green status symbols rolling through West Los Angeles. But they would provide carmakers and car buyers with transparent long-term incentives. Notably, those car buyers could be of any income. Of all the findings in Deloitte's market research, the most poignant was its profile of electric car "non-adopters." They have average household incomes of $54,000, live in the suburbs and rural areas, and depend heavily on their cars. There are millions and millions of nonadopters all across America. They are the middle class.

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Charles Lane writes about the economy for the Washington Post editorial page.