Why Electric Vehicles Should Be Subsidized

Updated: Dec 15, 2020

Written by Martin Bush, Dec 2, 2020

Recent studies have shown that in many countries, including North America and Europe, electric vehicles (EVs) are cheaper to own and run than conventional internal combustion engine (ICE) vehicles.

This is primarily due to the much lower operating and maintenance costs of EVs compared to ICE cars. However, although the cost of EVs is declining, they are still significantly more expensive than conventional gasoline or diesel cars and SUVs of similar size. In a number of jurisdictions, this sticker price differential has been offset by government-funded rebates that are available to people purchasing a new electric car. The Canadian government provides a rebate of $5000, and several provinces including Quebec and British Columbia provide additional rebates of $8000 and $3000, respectively. The rebates have stimulated the sales of EVs in these two Canadian provinces, which now have the highest rates of EV sales in Canada.

Subsidizing electric vehicles remains a controversial policy. In 2018, the Ontario Progressive Conservative government cancelled the provincial rebate for the purchase of electric vehicles saying that it was “going to people who could already afford expensive cars”.

The argument in favour of incentivising the purchase of electric vehicles has generally centred on the reduction of emission of greenhouse gases—since battery electric cars have zero emissions. In countries that have committed to reducing greenhouse gas emissions in accordance with their Paris Agreement targets, the electrification of the transport sector is a cornerstone of GHG emission reduction policy. However, there is another important reason to transition to electric vehicles-- one which has unexpectedly come to the fore during the Covid-19 crisis.

Air pollution in the world’s largest cities is dramatically reduced when there are fewer vehicles on the roads. This phenomenon has been noted in all countries where a lockdown policy has been introduced and enforced.

Air pollution in urban environments has a serious impact on residents’ health. High levels of nitrogen dioxide, particulate matter, and ground level ozone, primarily generated by ICE vehicles cause, or exacerbate, respiratory diseases and asthma, as well as worsening other health related issues such as stroke and even infant mortality. In Europe, a 2018 study estimated the external cost of all modes of transport has high as 1 trillion euros a year. Of this amount, approximately 26% is attributable to conventional road vehicles burning gasoline and diesel fuel. With roughly 290 million cars on the road in Europe, the operation of a single ICE vehicle is therefore responsible for about 900 euros a year in external economic costs—which translates to almost $1400 CAD a year. This figure is the same order of magnitude as the estimation of the external cost of operating an ICE vehicle in Toronto which, based on a 2005 report by the Ontario Medical Association, is roughly $1600 CAD per year for a single car.

An electric vehicle should last at least eight years--in which case the reduction in health-related external costs borne by the Ontario provincial government adds up to over $12,000.

But this is only part of the savings in the external costs resulting from the operation of an EV as opposed to an ICE vehicle. A conventional car or SUV clocking up about 20,000 km a year emits about 4 tonnes of carbon dioxide each year. Replacing this car with an EV, over an 8-year period, reduces greenhouse gas emissions by 32 tonnes of carbon dioxide—just from a single vehicle. The social cost of carbon dioxide varies enormously between jurisdictions—anywhere from less than US$10 per tonne to over US$100/t in Europe. Whichever figure is used, it is clear that there are compelling economic reasons for incentivising the purchase of electric vehicles.

An additional consideration to take into account is that the promotion of electric vehicles need not be based entirely on a rebate. An electric vehicle is less expensive to operate than a conventional car. Some reports estimate that the cost of operating an electric vehicle is less than half the cost of running an ICE car or SUV. In Canada, the savings for an average driver are reported to be as much as $1800 a year. One could reasonably expect that a person benefitting from say a $12,000 rebate on the cost of a new electric vehicle might reimburse part or all of the rebate at a rate calibrated to be less that his or her monthly savings. This concept is analogous to Toronto’s Home Energy Loan Program (HELP) where a loan to a homeowner defrays the upfront cost of home improvements that increase the energy efficiency of the residence and substantially reduce monthly energy costs. The HELP loan is repaid through an increase in the property tax on the residence at a rate which is calibrated to be less than the homeowners annual savings.

The conclusion drawn from this analysis is that the incentivisation of electric vehicles is fully justified—and should even be increased. The incentive should be at least $12,000—an amount which is offset by the reduction in government expenditures generated by the use of a conventional ICE vehicle. From a government perspective, the policy is revenue neutral: the cost of the incentive is covered by a partial repayment by the car owner with the remainder compensated by the reduction in the healthcare costs borne by provincial healthcare services.

About the Author

Martin Bush is a Director of Neighbours for the Planet.

Martin has written two books about climate change and how renewable energy is the key to bringing the crisis to an end. He holds a Ph.D. in chemical engineering and fuel technology, and a M.Sc. in protected area management. You can also read other articles from Martin, on his website Climatezone.org.

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