How the Economics of the Left and Right Have Failed the Electric Car

In a recent New York Times Magazine article, “Why Your Car Isn't Electric,” Maggie Koerth-Baker works through why consumers prefer gas cars over electric vehicles (EVs). She finds that Americans aren’t flocking to EVs because they have a fundamentally different idea of what a car should be. Consumers want vehicles that perform (and cost) like the gas cars they’ve grown accustomed to over the last century. Until EVs meet these performance and cost expectations, consumers will continue to purchase gas cars. Yet, to-date America’s dominant climate and energy policy approaches fail to aggressively address these barriers, instead focusing on deploying today’s uncompetitive EVs. Electrifying America’s transportation fleet requires throwing away these tried-and-failed approaches and instead focusing on innovating better and cheaper electric cars.

In Shifting Gears: Transcending Conventional Economic Doctrines to Develop Better Electric Vehicle Batteries, the Information Technology and Innovation Foundation takes an in-depth look at how the two default climate and energy policy approaches – informed by neo-Keynesian and neoclassical economic doctrines – have failed to spur the adoption of EVs.

On the one hand, neo-Keynesian economic thinking holds that demand drives economic growth (and innovation). Under such thinking, if companies believe consumer demand for electric vehicles is increasing, they will invest in better EV technologies to produce innovations that meet consumer expectations. Thus, the neo-Keynesian policy of choice has been to subsidize consumer purchases of EVs to boost demand. And it’s a policy that is on the books in America today: consumers can benefit from a $7,500 federal tax break for buying qualifying EVs, as well as a smattering of state incentives.

On the other hand, the neoclassical economic doctrine holds that economic growth (and innovation) is primarily the result of the efficient allocation of resources. In other words, the economy can be viewed as a large market of goods and services that is generally in equilibrium. Under this doctrine, in cases where the market is not in equilibrium – for example, when the societal costs of emitting greenhouse gases (GHGs) are not internalized – government should work to account for those externalities. The most prominent solution to internalize the cost of GHGs is a carbon price. In the case of the transportation sector, neoclassicalists assume that if drivers pay the full cost of burning gasoline, including the cost of pollution and climate change, EVs will become cost-competitive with gas cars and their adoption will dramatically increase. Good examples of such policies are those on the books in many European countries, which through a combination of fuel taxes and carbon pricing schemes, have increased the price of gasoline to $8 to $9 per gallon, while the United States continues to pay around $3 to $4 per gallon.

Yet both approaches have completely failed at spurring a robust EV market. In the United States, EVs make less than a blip in vehicle sales. In total, 286,371 EVs – including hybrids, plug-in hybrids, and battery electric vehicles – were sold in 2011 in the United States, a market share of new sales little more than two percent. Technology Review reports that the nation’s EV battery factories are sitting idle or operating well below their intended capacity.

Even more telling, Reuters reported in September 2012 that Toyota “scrapped plans for widespread sales of a new all-electric minicar, saying it had misread the market and the ability of still-emerging battery technology to meet consumer demands.” Company Vice Chairman Takeshi Uchiyamada observed, “The current capabilities of electric vehicles do not meet society’s needs, whether it may be the distance the cars can run, or the costs, or how it takes a long time to charge.”

Europe is grappling with the same problems. Even though 17 of the 27 European Union countries employed a carbon-related tax on gasoline cars as of 2011 and many countries implement EV subsidies, sales have remained sluggish. Since early 2011, Nissan sold 11,000 battery-electric Leafs in the United States, but only 3,000 in Europe. “European newsletter Automotive Industry Data (AID) said that despite meaty government subsidies, electric cars managed a market share of 0.09 percent in Western Europe last year,” reports The Detroit News. The situation is particularly dire in Portugal, which offers not only direct purchase subsidies, but also income tax relief of up to 30 percent for electric vehicle buyers. Portugal’s Secretary of State for Public Works, Transport and Communications Sergio Monteiro laments, “The average cost [of an EV] is around [$45,000 USD] in Portugal, and we have a reduction of [more than $6,200 USD] subsidized by the state. We only managed to sell 200 vehicles [in 2011].”

None of this should be surprising. As indicated by Koerth-Baker in her NYT Magazine piece, what’s holding back EV adoption is a lack of both cost and performance competitiveness relative to conventional gas cars. EVs can cost substantially more than gas cars, even when considering lifetime operating costs. And the performance of today’s EVs can also be underwhelming. Whereas gas cars can travel more than 300 miles between refueling, today’s EV batteries have a range of less than 100 miles per charge, have difficulty operating in very hot and very cold conditions, and can take anywhere from 30 minutes to 20 hours to fully refuel, depending on the re-charging technology.

The problems hampering EV adoption can be solved, but only if policymakers and advocates stop looking to the neoclassical and neo-Keynesian economic doctrines as the North Star guide to climate and energy policy. Instead, the emerging field of “innovation economics” offers guidance on how policy can spur the development of the kinds of breakthrough technologies that will make EVs and other clean technologies viable. In that vein, Shifting Gears lays out a series of steps that the federal government can and should take to encourage EV innovation. This includes:

1. More aggressively funding battery innovation, possibly by diverting funds used for the EV tax credit to instead support key battery innovation programs, like the Advanced Research Projects Agency-Energy’s (ARPA-E) Batteries for Electrical Energy Storage in Transportation (BEEST) program as well as the National Labs.
2. Fostering greater collaboration between the Department of Defense (DOD) and the Department of Energy (DOE) on battery development to create an early market for emerging battery designs and chemistries.
3. Supporting the creation of a “Battery Shot Initiative” akin to DOE’s SunShot Initiative to coordinate government battery RD&D with the goal of producing a battery with a total system cost of less than $100/kWh and a range of at least 300 miles per charge.

If the world is to substantially reduce greenhouse gas emissions from the transportation sector, EVs must become the vehicle of choice for consumers everywhere. The most important step, however, is greater innovation to create electric cars that they actually want to buy and drive.

Matthew Stepp is a Senior Policy Analyst and Clifton Yin is a Research Analyst at the Information Technology and Innovation Foundation.