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.

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.

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.

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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