The government's Clean Car Discount scheme has been in the news this week. As Stuff reported:
The Government is changing the Clean Car programme to increase fees slapped on higher emitting vehicles, changing the rebates for zero emissions imports and lowering the threshold for eligible vehicles.
The changes come as the scheme was “successfully exceeding industry and government projections”, Transport Minister Michael Wood said, after it was reviewed a year into its full implementation.
It is timely to remind ourselves of the positive and negative aspects of a subsidy. A subsidy leads to a deadweight loss (as I outlined in the footnotes to this post from 2021 when the electric vehicle (EV) subsidy scheme was introduced). That is, there is a loss of economic welfare associated with a subsidy. However, as I noted in that same footnote:
...this assumes that there are no positive externalities associated with electric vehicles, which there probably are - a person buying an EV is a person not buying a carbon-powered vehicle, and so each EV sold reduces carbon emissions (and reducing a negative externality is the equivalent of a positive externality).
It is possible that a subsidy on a good that has a positive externality (or that reduces a negative externality) could increase total welfare. However, that is not the only reason that we might favour a subsidy for EVs.
Think for a moment about the infrastructure that exists to support petrol vehicles. In most towns and cities, there are many petrol stations where cars can refuel. It is very easy and inexpensive for a petrol vehicle owner to find somewhere to refuel. Now think about the corresponding situation for electric vehicle owners. Although there are electric vehicle charging stations around (in mall carparks, for example), the infrastructure is nowhere near as available as it is for petrol vehicles. An EV owner faces a more difficult and costly (in time and effort) exercise to charge their vehicle away from home.
Clearly, the fact that there are few places to charge EVs means that there is not as much incentive for firms to provide EV charging as there is to provide petrol refueling. Most of the reason for a lack of EV charging infrastructure is simply a lack of demand. However, there is a bit of a chicken-and-egg problem here. If there are few places to charge EVs, then few consumers will buy EVs. And if few consumers buy EVs, then there is little incentive [*] for firms to provide EV charging stations. In other words, there are positive network externalities across these two goods (EVs, and EV charging stations). The more EVs there are, the more profitable it is for a firm to provide EV charging stations. The more EV charging stations there are, the more value there is for each EV driver, since they can more easily find somewhere to charge their vehicle.
Subsidising electric vehicles may help us to get out of this chicken-and-egg situation. Having more EV owners (because EVs are less expensive as a result of the subsidy) creates incentives for firms to build out the charging infrastructure necessary to support EVs. The subsidy acts as a kickstart for the process of building more EV charging stations, which then makes it easier to own an EV, which incentivises more charging stations, and so on. The process snowballs. So, quite aside from any argument associated with environmental externalities, there is an argument to be made for a subsidy.
However, what is not at all clear is whether this is the right subsidy to achieve the goal of kickstarting an EV-charging snowball. The same outcome could be achieved by subsidising the EV charging stations, rather than the EVs. Subsidising EV charging stations might even be less costly for the government, as it would mean dealing with fewer subsidy recipients (reducing the transaction costs of the subsidy). That is the approach adopted in the US, where Tesla is making its charging network available to owners of EVs from other manufacturers, in order to receive a subsidy from the US government.
The key difference between the two subsidy options is political. Subsidising consumers to buy EVs provides a handout to voters (or at least, to voters who buy EVs). Subsidising firms to build EV charging stations provides a handout to firms. Handouts to voters play out much differently in the media than handouts to firms. It should be little surprise then, that a government might prefer to subsidise EVs rather than EV charging stations, even if subsidising the charging stations would be less costly for the same outcome.
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[*] Note that there isn't no incentive for firms to provide EV charging stations. Firms with environmental goals, or firms that want to look like they are supporting green causes, may provide EV charging stations even if there is little demand for them.
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