Big Oil Doesn't Like EV Subsidies, Just Its Own Giant Subsidy

(Bloomberg Opinion) -- You may not have heard, but electric vehicles are just another one-percenter boondoggle, Jay Gatsby’s cream-colored Rolls Royce reincarnated and partly paid for by you, the toiling masses, via various subsidies. 

As an argument, it is tailor-made for an era of anger at “elites.” And it’s one with which I’ve become familiar reading recent letters from organizations such as Koch Industries Inc., affiliates of the American Petroleum Institute and Americans For Prosperity, urging federal and state bodies to forgo support for electric vehicles or their chargers. If wealthier types wish to buy them, so be it, but they should pay for it themselves. As Koch’s letter opposing an extension of the federal tax credit for EVs puts it:

I encourage you to allow innovation and consumer choice to drive this industry, not tax dollars and government subsidies.

Stirring stuff, though it does rather gloss over some niggling details. 

They aren’t wrong about one thing: Subsidies for EVs tend to accrue to the wealthy. A paper published in 2015 by Severin Borenstein and Lucas Davis of UC Berkeley found exactly that. One explanation is that, even when subsidized, today’s EVs are usually more expensive than regular vehicles, so they are bought by wealthier people.

This is clearly unfair. However, as Berkeley’s Borenstein and Davis wrote in a blog post summarizing that same paper:

We find that tax credits are less attractive on distributional grounds than pricing [greenhouse gases] directly … Whereas tax credits go disproportionately to high-income households, a carbon tax would be paid disproportionately by high-income households. 

This uncovers the main problem with the whole elitist EVs argument: If not these subsidies, then what?

Addressing climate change means encouraging a switch away from emitting vast quantities of greenhouse gases into the atmosphere in order to power our societies. Leaving aside the unfortunate desire of certain parties to ignore or obfuscate the science framing that threat, the central question is how to encourage that switch most efficiently. In general, handing out regressive subsidies based on the government elevating this or that technology, while perhaps politically more doable, doesn’t meet that objective.

A far-more efficient method is to put a price on the stuff you want less of and then let capitalism do its thing, pushing consumption away from the undesirables and investment toward innovative alternatives. Indeed, all these letters demand government officials stand back and let the market do its thing – except their version of the market leaves out one essential element. 

Greenhouse gases and the threat they pose are everyone’s problem, but the individual generating them at any given moment doesn’t pay toward dealing with that. Dump your garbage on your neighbor’s lawn and you’ll wind up paying to have it removed and probably a fine, too. Release 20 pounds of carbon dioxide into the atmosphere by burning a gallon of gasoline, and it’s a freebie.

This is an enormous effective subsidy for fossil fuels and makes a mockery of market piety. Using Yale economist and  recent Nobel-prize winner William Nordhaus’s $31-per-tonne estimate of the social cost of carbon, it amounted last year to $107 billion for energy-related emissions from oil and natural gas in the U.S. Within that, emissions from transportation – the biggest source in the U.S. and the only one still growing – enjoyed a free ride worth $59 billion.

The cost of the federal tax subsidy for EVs is $2 billion at most across the lifetime of the current program, according to a study cited in the Koch letter (title: “Costly Subsidies For The Rich”). You may have noticed, too, the U.S. oil and gas industry is not exactly hard up. A quick scan of the Bloomberg Terminal indicates listed companies in the sector are forecast to make a collective net profit of $81 billion this year. What was that about handouts to wealthy elites again?

The added twist is that the negative effects of climate change fall disproportionately on the poor. Low-income countries tend to be in regions likely to suffer the worst consequences and also lack adequate resources to deal with them (see this from the International Monetary Fund). Similarly, a week before  California’s most destructive wildfire ever got going this month, researchers from the University of Washington and the Nature Conservancy published a study finding poorer communities and people of color are especially vulnerable to the devastation of wildfires in the U.S.

There are legitimate, complex issues to be dealt with in apportioning the costs of decarbonization. For example, the API's letter mentioned above objects to proposals in Maryland for utilities to invest in vehicle-charging infrastructure, arguing ratepayers would foot the bill to the benefit of, you guessed it, “ a small group of upper-income households who use EVs.” The question of how charging points are financed is tricky, partly because the grid is built around regulated monopoly utilities serving, and billing, millions of customers.

But the API’s call for the creation of “a level playing field” between internal combustion engines and EVs is risible. It never grapples with the fact that the lack of a penalty for carbon emissions is the single biggest obstacle to a level playing field, and precisely why officials trying to deal with climate change resort instead to sub-optimal workarounds like subsidies. This isn’t a plea for more of those; far from it. Instead, consider it an addendum to those missives on the sanctity of markets, merely pointing out the one vital element the authors of the letters somehow forgot to include.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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