Electric cars: government failure?

There was a great in-depth look at activity in the car market in the Sunday Times yesterday with regards to electric powered vehicles.

This is the link if you didn’t see it.

And if you can’t break through the paywall, here is the best bit, with some associated exam-style Unit 1 questions.

“Driving in Britain has become a tale of the haves and have-nots. The haves are lavished with taxpayer-funded discounts on new cars; they are exempt from fuel duty and road tax and pay less Vat; and they benefit from free parking in many cities.

The have-nots, by contrast, are labouring under record fuel prices, many pay more tax on buying a new car than they would have a year ago, thanks to a new “showroom tax”, and — even if driving a modest family estate — they are also paying more road tax in real terms than they were three years ago.

So determined is the government to encourage the use of electric cars that it is going to extraordinary lengths to promote their use, at the expense, critics say, of other motorists. So far the government and local councils have spent £42.87m on schemes to install recharging stations and to pay for a £5,000 discount for every electric car sold. The scheme has been running since January 1, but by the end of March only 534 people had signed up. These early adopters join owners of other electric vehicles (EVs), such as the Reva G-Wiz, which is officially classified as a quadricycle and does not qualify for the £5,000 grant. At the end of April, a total of 1,879 EVs were registered on British roads. It means the cost to the taxpayer for each EV, including infrastructure and electric-car grants, is £22,815.

If other taxpayer-funded initiatives are included, such as the Energy Technologies Institute Joined-Cities Plan to build a national network of charge points (£11m), the Technology Strategy Board low-carbon innovation platform, which has awarded grants to 70 projects for research into green cars including electric vehicles (£110m), and Ofgem’s Low Carbon Networks Fund, which finances energy firms’ research into managing electric car recharging demand (£24.26m), the cost per EV on the road rises to £100,122. This figure will reduce as the take-up of electric cars increases.

The question is, has the government gone too far in subsidising electric car owners when ordinary motorists are facing record costs? As well as the grant for buying a car and the money lavished on underused recharging stations, owners of electric cars also benefit from generous subsidies to their running costs.

The biggest perk is that electricity used to recharge the car is not subject to duty and attracts Vat at 5% rather than 20% for petrol or diesel. This means that, while the owner of a Ford Focus 1.6, travelling an average of 12,000 miles, would contribute £919 to the Treasury in fuel duty and Vat, an electric car owner would pay just £10 in Vat on the electricity used to recharge the car.

In addition, because road tax calculation is based on emissions levels, electric cars are exempt while the Focus driver has to pay £115 a year. In fact, taking into account the various taxes applied to petrol or diesel-powered cars, a Focus driver will contribute £4,127 to the Treasury in the first year of ownership, while an electric car owner will in effect receive a £657 rebate and pay significantly les tax in subsequent years (see panel).

All of this would make more sense to the average motorist struggling to fill up their tank if the case for electric cars were overwhelming. But it isn’t. A report by Richard Pike, former chief executive of the Royal Society of Chemistry, argues that cars generate 12% of the UK’s carbon emissions. Since around 90% of the electricity used to power electric cars in Britain comes from fossil-fuel-burning power stations, he calculates that, if every car on the road were electric, that figure would be reduced to about 10% — hardly enough to merit the massive subsidy programme under way.

“The problem with electric cars is that too few people are sitting down and doing the calculations,” he says. “There are far too many little myths appearing and they are going unchallenged in the rush to promote electric vehicles.”
The point is supported by Professor Roger Kemp of Lancaster University, chairman of the Royal Academy of Engineering’s electric vehicles working group. “Swapping gas guzzlers for electric vehicles will not solve our carbon emissions problem on its own,” he says. “When most electricity in Britain is still generated by burning gas and coal (as opposed to nuclear or renewable), the difference between an electric car and a small, low-emission petrol or diesel car is negligible.”

Kemp also thinks the recharging station network has been poorly thought through. “Most of the recharge points are in car parks, but that is the last place you would want one. The majority of people will recharge their cars at home overnight, when there is a low electricity tariff; car parks are generally used during the day, which is likely to be at peak tariff time. I think quite a few people in government may be saying, ‘Let’s just get the cars on the road and deal with the problems later.’”

Car makers defend the investment and point out that it has resulted in a huge fillip for British industry, such as the Nissan battery factory in Sunderland. “People have to be encouraged to take up new technology and the government must help this happen,” says Paul Everitt, chief executive of the Society of Motor Manufacturers and Traders (SMMT). “The car makers are doing their bit by producing these cars that are currently not commercially viable. It is the government’s job to collect taxes and then decide where to distribute them.
The infrastructure will be there for many years.”

Even so, warnings that too much is being invested in electric cars without enough research into the implications of widespread take-up are not confined to Britain. In Germany, where electric cars are tax-exempt for five years, the issue has split the government. A German environmental group said last week: “A lot of money is going to be handed out to support electric cars instead of making gasoline and diesel cars more efficient,” it said. In America, where President Barack Obama announced his goal of having a million electric vehicles on the roads by 2015, they have been dubbed “welfare wagons” because of the subsidies they attract.

In Britain, sales of electric cars are expected to increase as more models become available. The SMMT predicts that between 3,000 and 5,000 will be on the road by the end of the year.”

Questions

Explain the term “market failure”

With the help of a supply and demand diagram, illustrate the effect of the government subsidy on the market equilibrium for electric powered vehicles.

Evaluate the case for and against goverment intervention in the automotive industry.