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.

Illustration by Rob Donnelly. Click image to expand.

It's official: The Chevrolet Volt, the new plug-in electric hybrid car from General Motors, will cost $41,000—that's a four-seat hatchback for about the base price of a BMW 335i. To be sure, a $7,500 federal tax credit cuts that to $33,500, and electricity is cheaper per mile than gas. But barring some huge oil price spike or stiff new gas tax, it would take more than a decade to offset the higher purchase price. Some will pay a premium for the frisson of going green or being the first "early adopter" on the block. Still, this little runabout is a rich man's ride.

And that's my problem with the Obama administration's energy policy, or at least with his lavish subsidies for the Volt, Nissan's all-electric Leaf (likely sticker price $33,000),  and Tesla's $100,000 all-electric Roadster: Where does the federal government get off spending the average person's tax dollars to help better-off-than-average Americans buy expensive new cars?

President Obama's ostensible goals are reducing both carbon emissions and the nation's dependence on foreign oil and creating "green" jobs. But it's far from clear that his program will actually achieve these laudable aims at a reasonable cost. And there are cheaper, more equitable policies. You might call the president's subsidies limousine liberalism—if only the cars were bigger.

How rarefied is the electric-car demographic? When Deloitte Consulting interviewed industry experts and 2,000 potential buyers, it found that from now until 2020, only "young, very high income individuals"—those from households making more than $200,000 a year—would even be interested in plug-in hybrids or all-electric cars. This "small number" of people will provide "nowhere near the volume needed for mass adoption." They will be concentrated in Southern California, where weather, state regulations, and infrastructure are all favorable to electric vehicles—"adoption is already being popularized by high-profile celebrities."

Eventually, Deloitte argues, a somewhat wider market may emerge: 1.3 million people with annual household incomes above $114,000 (double the national median). Of these, however, many will not actually buy, because of the electrics' shortcomings in size, range, and comfort. "For E.V.s to become popular, they must mimic the experience and performance that drivers have become accustomed to," Deloitte notes. Today's models, and those of the foreseeable future, can't do that.

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Annual sales will hit no more than 465,000 by 2020, according to Deloitte—a mere rounding error in a 250-million-car national fleet. This projection is consistent with others by Boston Consulting Group, Resources for the Future, PriceWaterhouseCoopers, and Honda Motor Corp., whose head of research and development recently declared that "we lack confidence" in the electric-vehicle business.

The Obama administration says it knows better, which is why it is not only subsidizing the purchase of electrics but spending heavily to help corporations build them. There's $2.4 billion in stimulus money for electric-car component factories, such as a Volt battery plant in Holland, Mich., whose groundbreaking the president attended in July. And the Energy Department has loaned hundreds of millions of dollars to Ford, Nissan, GM, Tesla, and Fisker.

The administration's theory is plausible enough: Ramp up production of the electric car's most expensive component, the battery, and its price will come down to mass-market levels. Economies of scale, and all that. It's worked for other former luxury products, like cell phones and laptops. As the president argued in Michigan, "Because of advances in the manufacturing, [battery] costs are expected to come down by nearly 70 percent in the next few years. That's going to make electric and hybrid cars and trucks more affordable for more Americans."

But the technical challenges of mass-producing cell phone batteries are relatively modest compared to mass-producing batteries for cars, and for the most part, cell phone and computer industries grew with private, not public, capital at risk. Notice that the president said "more" affordable, not "affordable." Cutting through the hype and bias that plagues official advanced-battery cost forecasting, a recent study by Boston Consulting Group projects a 60 percent to 65 percent reduction in the cost of batteries to car manufacturers by 2020—smaller and later than Obama's bullish claim.

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