Friday, October 2, 2009

Electric Vehicles, Tax Credits, and Subsidies

Over the summer I wrote a paper in which I examined the efficacy of subsidies and tax credits to electric vehicles. I must admit that I am actually quite bullish on the prospects of EVs. Tesla Motors has made tremendous strides towards making EVs economical, though battery manufacturers still have a long way to go before EVs can get the distance per charge that will be required for them to render the internal combustion engine obsolete.

Despite my optimism surrounding the technology, I am extremely skeptical of government subsidies. One only needs to think back to the hydrogen vehicle craze of the early part of the decade to see how bad governments are at picking winning technologies. After $1.2 billion dollars of subsidies, hydrogen vehicles have fallen by the wayside. Even if electric batteries are the fuel of the future, direct subsidies will not necessarily help their development. Subsidizing one battery company would impede the ability of other companies to compete. There is no reason to think that the Federal government will just happen to choose the right model.

To put this in perspective, think back to when the internal combustion engine was first invented. Of the thousands of entrepreneurs in the market, hindsight tells us that Henry Ford had the best business model. Now, imagine that another company had received federal grants to commercialize their own automobile. Would automotive technology be where it is today? There is no way of telling. For all we know, none of us would know the name Henry Ford, and all of his innovations would have fallen by the wayside. It is only by allowing competition in the marketplace of ideas that we discover the best technologies. If electric vehicles are to become the dominant technology, as I believe they will, it will be made so by entrepreneurs, not bureaucrats.


  1. Your appeal to Ford is misleading. His contributions to industry lay not in the development of technology but rather to a particular method of doing business.

    While I am, as a general rule, opposed to subsidies, there is merit in providing subsidies for technological development as it creates an incentive to enter one's brain power into the appropriate "marketplace of ideas". While these subsidies do provide distortions to the market, there is something to be said for deciding which technologies will yield the greatest social utility (rather than pure monetary gains) and incentivizing development in that sector.

  2. The trouble with picking winners is that you not only have to choose which type of technology will be best, but which company will produce the best model. While this is theoretically possible, it is not a guarantee. What is more likely is that the subsidized company will crowd out competitors, which may in fact have better technology. One subsidy scheme that could potentially work was the McCain proposal to create a prize (like the X-Prize) for the creation of a car battery that met certain specifications. Having said that, this proposal is no longer on the table.