Federal Government Won’t Outsmart the Free Market

The Congressional Budget Office has come out with an analysis of the cost to the government (and consequently to taxpayers) of subsidizing electric cars, primarily through tax credits.  What did they find?  Not only are these subsidies extremely costly to taxpayers and consumers.  They are also very ineffective at accomplishing the stated goal of protecting the environment.

Even with $7,500 taxpayer-funded rebates for electric vehicles, people still are not buying them.  CBO explains that despite the tax credits, electric vehicles have a higher lifetime cost for consumers.  In fact, in order to be cost-competitive with a conventional vehicle, the vehicle would require a tax credit of more than $12,000. 

Enter Corporate Average Fuel Economy (CAFE) standards.

These government imposed CAFE standards make the picture even grimmer for electric vehicles. Why?  CBO explains that without CAFE standards, the cost to government of subsidizing electric vehicles is $3 to $7 per gallon saved when compared with conventional or hybrid vehicles.  The cost to government in terms of reducing greenhouse gas emissions is also very high:

$230 to $4,400 per metric ton of carbon dioxide equivalent emissions reduced when people buy electric vehicles that are comparable to conventional vehicles with average fuel economy; that cost also depends on the emissions released in generating the electricity used to recharge the vehicle’s batteries.”

Without CAFE standards, electric cars themselves do in fact reduce gasoline consumption and greenhouse gas emissions.  The catch is that these are only the direct effects of electric vehicles.  But the effects of electric vehicles are not isolated in the market.

CAFE standards only make the costs higher and completely fail to effectively protect the environment:

“Increased sales of electric vehicles allow automakers to sell more low-fuel-economy vehicles and still comply with the federal standards that govern the average fuel economy of the vehicles they sell (known as CAFE standards). Consequently, the credits will result in little or no reduction in the total gasoline use and greenhouse gas emissions of the nation’s vehicle fleet over the next several years.”

The government has tried to artificially make electric vehicles competitive in the consumer market, and CBO explains that unless policies regarding tax credits for electric vehicles are actually informed by the real demand for these cars, they will continue to be futile far into the future.

Conservative energy analysts and economists would take this concept to its logical conclusion, which is that tax credits are never a good idea.  The federal government, as we’ve said before, should not be in the game of picking winners and losers because they are really bad at it.  However noble the stated cause may be, the federal government has proven itself totally unable to outsmart the market, or to outsmart consumers.

As Heritage has explained, “the free market is meeting consumers’ needs by improving existing technology and doing so without government-funded incentives.”  And the CBO has – perhaps inadvertently – provided further evidence that government attempts to manipulate the market have proven a mistake.  Policy makers should keep this in mind when they are thinking about energy policies in the future.

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