Ian Irvine is a professor of economics at Concordia University and associate researcher at the Montreal Economic Institute
Ontario has just trumped Quebec in designing and implementing an extraordinarily wasteful electric-vehicle (EV) subsidy policy. As of January, 2017, certain battery-powered vehicles qualify for purchase subsidies of up to $14,000. This follows hard on the heels of the Quebec government's Bill 104 that mandated minimum sales of electric vehicles for all major vehicle manufacturers, beginning in 2018.
Ontario's purchase subsidies, which are similar to smaller subsidies available in Quebec and British Columbia, have been shown in a multitude of peer-reviewed environmental studies to be inefficient. They are also regressive, in that they provide the biggest benefits to buyers at the very top of the income distribution.
In an article in the March, 2017, issue of Canadian Public Policy, I point out that the Ontario EV subsidies and the Quebec EV mandates will have little effect on carbon-dioxide (CO2) emissions. These measures will encourage EV purchases. But their effects on CO2 are largely cancelled out by their interaction with other environmental legislation.
The United States and Canada are governed by the same set of fuel-efficiency regulations. At present, every manufacturer is required to reduce CO2 emissions in passenger vehicles by 5 per cent per annum until the year 2025. Light trucks are subject to a 3.5-per-cent requirement.
These rules are defined as the corporate average fuel-efficiency requirements (CAFE). Vehicles with larger footprints are permitted higher emissions than smaller-footprint vehicles, but every manufacturer's fleet of vehicles must register such an annual average improvement.
Therefore, since only the average matters, selling an EV means that the manufacturer is subject to less stringent emissions standards on vehicles propelled by fossil fuels. In fact, EVs are given extra credit so that the direct CO2 reductions from an EV sale can be more than offset by increased CO2 emissions on the sales of other vehicles.
For example, suppose the subsidy induces the sale of an EV in place of a conventional vehicle with the same footprint, and this substitution prevents the emission of 150 grams of CO2 per kilometre travelled.
Under CAFE, the manufacturer is permitted to relax the emissions standards on its conventional vehicle fleet by a factor of 2.5 times that 150 g/km figure.
This credit offset is designed to encourage research and development in the EV sector. When the CAFE standards were designed for implementation (2012), the legislation set a high standard for annual efficiency improvements with the full knowledge that the carbon credit would both encourage R&D in the EV sector, and also moderate the annual efficiency requirements. But CAFE ensured that the cost of achieving the efficiency improvements initially falls upon manufacturers and ultimately upon all buyers.
In this world, subsidies are impotent. They will indeed result in more EVs being sold, but at a huge cost.
First, the subsidies go to all buyers, not just those who would not have bought without the subsidy. If half of buyers would have purchased a vehicle qualifying for a $14,000 subsidy anyway, then each additional EV purchased actually costs taxpayers $28,000. Second, these additional purchases will not reduce GHGs in the near term, given the carbon credits that arise under CAFE. They simply loosen the efficiency requirements on conventional vehicles.
But might the subsidy-induced purchases in Ontario result in ultimately cheaper EVs? No, because meaningful volume impacts on manufacturer costs do not emerge from small jurisdictions representing a tiny part of the world market.
In addition to not reducing emissions, the research literature demonstrates that subsidies for things like home improvement or vehicle purchase disproportionately benefit households at the top of income distribution. Low-income households have low home-ownership rates, and do not purchase Teslas or BMWs.
Provinces must also recognize that they work in a federal system. If one province institutes higher environmental standards in the vehicle sector, then, since manufacturers are subject to a federal emissions standard, they can relax their required efficiency standards in other provinces: More EV sales in Quebec thus enable manufacturers to sell more conventional vehicles in the Maritimes, for instance.
This is the problem with Quebec's Bill 104, which mandates minimum EV sales in the province: Its higher standards will lead to dilution in the rest of Canada.
The main effects will be on the formation of a bureaucracy in government, on the compliance costs of manufacturers and on the employment of lawyers who will argue each side of a largely ineffective law.