As far as I can tell, the Queensland Government hasn’t released any economic analysis of its $3,000 electric vehicle (EV) subsidy, probably because, if it did, the analysis would reveal the subsidy was a poor use of public funds. Some back-of-the-envelope calculations can illustrate this.
First, let’s work out the reduction in greenhouse gas (GHG) emissions associated with an EV. According to PwC, in its 2018 Recharging the Economy report on p. 18:
An average new ICE [internal combustion engine] vehicle emits roughly 185 gCO2/km compared to average new EVs which emit 98 gCO2/km if charged via the electricity grid. When charged via renewable energy sources, EVs emit zero emissions. As renewable energy represents an increased proportion of the electricity mix and battery capacity improves, EV emissions are estimated to fall to 58 gCO2/km.
Now, according to the ABS’s Survey of Motor Vehicle Use, the average distance travelled per year by passenger vehicles is 11,100km. Using this estimate, and the average CO2 emission estimates reported by PwC for ICE vehicles and EVs, it can be calculated that each new EV should result in a reduction of GHG/C02 emissions of 1.0-1.4 tonnes per annum.
Let’s be generous and say each EV has a life expectancy of 20 years, which would mean 20-28 tonnes of GHG emissions avoided over its lifetime. If every household receiving the $3,000 EV subsidy would not otherwise have purchased an EV, that would mean the Government would effectively pay $107-150/tonne for GHG abatement. But I expect a lot of people who end up getting the subsidy would probably purchase an EV anyway. If we assume half of the EVs subsidised would have been purchased anyway, then the Government would effectively be paying $214-300/tonne for GHG abatement. This would be very poor value for money. Consider the following:
- The Centre for International Economics (CiE) has estimated Australia’s cost of GHG abatement at around $40-50/tonne (see p. 49 of the CiE report What existing economic studies say about Australia’s cost of abatement);
- Australian Carbon Credit Units (for a tonne of GHG abatement) are trading at $31, according to the Renewable Energy Hub, and hence it would be cheaper for the state government to buy carbon offsets instead of subsidising EVs for a given level of emissions reduction; and
- the social cost of GHG emissions is unlikely to be much higher than $100/tonne (e.g. see this Brookings note The social cost of carbon which refers to a 51 USD/tonne estimate), and hence governments should be unwilling to spend any more than $100/tonne to reduce GHG emissions.
All these figures suggest that the Queensland Government will pay far too much to abate GHG emissions with its EV subsidy. There would very likely be much more cost-effective emission-reduction measures it could support, and much better uses for the $45 million this subsidy will cost the budget.
I’m not criticising EVs, which are certainly the way of the future. I’m criticising the state government’s $3,000 subsidy. It look likes a high-cost way to achieve additional GHG emission reductions – i.e. reductions beyond those which would occur anyway as people naturally switch to EVs over time.
I’d really like to see the Queensland Government’s analysis of the cost-effectiveness of its EV subsidy, although I suspect it didn’t prepare one, because it probably guessed the analysis wouldn’t look good, or it doesn’t care about the cost-effectiveness of its policy measures, only their political attractiveness.
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This ignores the economic benefits. Money spent on charging an EV stays in Queensland; money spent on importing petrol and diesel does not. EVs have lower rtotal cost of ownership which is a benefit to household budgets and allows household cash to be spent on other goods.
Subsidies on rooftop solar increased the uptake which reduced the cost. The same will happen with EVs.
Thanks for the comment, Arthur. In my view, what matters for our standard of living is how well we use our resources (i.e. labour and natural and physical capital). If it’s cheaper to import something than make it here, then it makes sense to do that. We can use the resources we don’t devote to producing the imported goods here to producing other goods and services. Import substitution for its own sake isn’t good policy.
That said, there is a benefit to households because it will be cheaper to power EVs via the grid than to power conventional vehicles via petrol and diesel. Households should already be factoring this in to their decision making regarding EVs, however.
The role for government here relates to the failure of the market to price in the external cost or “externality” of greenhouse gas emissions. That is, households don’t necessarily recognise there is a social good associated with their purchase of an EV, i.e. reducing GHG emissions. The question is what is the best policy mechanism to get them to recognise this? It may be a carbon price, although ideally this would be implemented globally so Australia isn’t disadvantaged. As discussed in the post, I don’t think a $3k EV subsidy makes sense from the perspective of a cost-effective response to climate change.
Finally, I acknowledge we may end up with costly measures such as this one because the alternatives are considered politically toxic (and could only be enacted by the federal government anyway). The textbook solution of a carbon price/tax would mean higher fuel prices, which would force consumers to switch to EVs, but no government would want to be seen as increasing fuel prices.
If EV were affordable I would have purchased one 3 years ago when my car was written off in an accident. EV is still not an affordable run around family car, due to high capital costs, and no real guarantee on the life of the expensive battery. I plan to buy an EV as soon as they become affordable, and charge at home with solar power.
Your calculations don’t include the embedded energy in manufacture and replacement of petrol with EV across the entire fleet. Would be good if they could get the cost of converting existing cars down.
iMO the EV vehicle revolution should be lead by the e-scooter and e-bike. Remove car parking from city streets and use the additional lanes for creating a safe environment for e-commuters. Using city streets for car storage during the day is very wasteful use of public resources. Better to spend the $3000 encouraging electric scoffers and bikes.
Same applies to the suburbs, remove one lane of street parking , and encourage e scooters and è bikes to use the lanes currently wasted in street parking.
Many thanks Gene! I agree and it also seems to have come out of the blue! Perhaps to give the media other things to talk about instead of hammering the government which the media have very good reasons to do so!