Economists, Environmentalists Wrangle Over EV Incentives

Last month, representatives from 200 nations around the world gathered in Paris to address the issue of climate change. Many of them believe the only hope for mankind is if the entire world transitions as quickly as possible to electric power and electric vehicles. They think the best way to get more people to buy electric vehicle is to give them significant financial incentives to do so. For them, the size of the incentive is irrelevant.

The chart above is an interactive map created by Plug In America. If you clink the link, you can see every federal and state incentive currently in effect. Colorado is the most generous state. It allows a credit of 80% of the purchase cost of a qualifying electric vehicle, up to a maximum of $6,000. Add that to the $7,500 federal tax credit, and the lucky people of Colorado can get a total of $13,500 off the price of an electric car.

The question of how much of an incentive should be given to promote the conversion to electric cars is one that many economists have strong opinions on. James Bushnell is an economist at the University of California – Davis. In December, he posted a long and carefully researched article on the Haas School of Business at Berkeley website. Bushnell’s primary question for environmentalists goes like this: “Is society getting good value for its money when it provides such generous incentives?” That’s an excellent question and one that has as many answers as the number of people who ask it. In general, the answer is, “It depends.”

His article is entitled Economists Are From Mars, Electric Cars Are From Venus and it’s an interesting read. The substance of his argument is as follows. “[Economists] Archsmith, Kendell, and Rapson, using $38/ton as a cost of carbon, estimate the lifetime damages of the gasoline powered, but pretty efficient, Nissan Versa to be $3200. In other words, replacing a fuel efficient passenger car with a vehicle with NO lifecycle emissions would produce benefits of $3200. That puts $10,000 in EV tax credits in perspective.”

Obviously, no economist worthy of the name would advocate for incentives that exceed their anticipated benefit by a factor of three. To an economist, that is just crazy talk. But who says the the cost of carbon is $38 a ton? The EPA sets it at $40, but may other researchers say it should be much higher. They think $200 to $400 a ton is more realistic. If that’s true, that makes a $10,000 incentive to drive a zero emissions car look like an absolute bargain.

David Roberts, writing for Vox on December 31, raises some cogent and troubling questions. “How much is a human life worth? You can’t calculate the benefits of saving one without a number. How much is it worth to avoid a sickness? How much are intact ecosystems worth? How much are other species worth?

“How much is a life this year worth compared with a life ten years from now, or 50 years from now? How much weight we give future costs and benefits relative to the present is measured by our “discount rate.” Discount rates are particularly important in climate change discussions, where the connections between cause and effect are measured in decades, sometimes centuries. The choice of discount rate can make the difference between a model that counsels urgent action and one that counsels delay.”

Max Weber, German economist, 1964 – 1920

In other words, the answer to how to address climate change is all in how you frame the debate and what questions you ask. Roberts tends to favor more rather than fewer EV incentives. His justification is that EVs have intangible benefits that are difficult to put a dollar value on. More EVs mean the electric grid gets greener, faster. Since electrification of everything is the only possible way to avoid climate disaster, let’s stop arguing over numbers and get busy, he says. After all, there won’t be any economists left to argue about these things if we are all dead from breathing poisonous air.

Roberts last point is that electric cars are popular with voters and politicians. Greening the electrical grid is not. Since EVs enjoy a high approval rating (thanks in large measure to the constant drumbeat in favor of them by Elon Musk), why not put all of society’s eggs in the EV basket, since EVs will necessarily promote the other worthy but less sexy measures the world needs? In other words, isn’t it ultimately better to swim with the current rather than against it?

Max Weber said “Politics is a strong and slow boring of hard boards.” Roberts calls it “a draining and frustrating business.” If the winds are blowing in favor of electric vehicles, isn’t it wise to take advantage of those breezes, he asks, even if the precisely correct amount of incentives cannot be calculated down to the last penny?  His final word to practitioners of  economics, which Thomas Carlyle calls “the dismal science,” is this: “There are more things in heaven and earth, Horatio, than are dreamt of in your economics.”