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Electric Cars Are the Future? Not So Fast

Posted by hkarner - 14. Juli 2017

Date: 13-07-2017
Source: The Wall Street Journal

Though they’re no longer ugly, impossibly expensive and impractical, electric vehicles need to out-innovate fossil fuels if they are ever to displace the internal combustion engine

Electric cars have a come a long way, but auto makers have more work do if they ever want to displace gasoline engines.

Skepticism of electric cars melts a bit more with each new announcement from the likes of Tesla, which last week launched production of a mass-market vehicle, and Volvo, which days later promised to phase out gasoline-only engines by 2019.

But that progress comes with two big caveats: First, it has relied on extensive public subsidies and, second, it has done little to reduce planet-warming emissions of carbon dioxide. If electric cars are ever to displace gasoline engines without government putting its thumb on the scale, they must not only keep innovating but outrun fossil fuels where productivity also keeps advancing.

Electric cars have come a long way. They are no longer ugly, impossibly expensive and impractical, thanks to technological advances that have slashed battery storage from $1,000 per kilowatt-hour in 2010 to $273 per kwh last year, according to Bloomberg New Energy Finance.

Nonetheless, that means a 75 kwh battery (about what you need for 250 miles of range) still adds about $20,000 to a car’s cost. So how do the cars sell? Public largess helps a lot.

The federal government offers a tax credit of up to $7,500 each for the first 200,000 electric or plug-in hybrid cars a manufacturer sells. Throw in state tax credits, subsidies for recharging infrastructure, relief from gasoline taxes, preferential lanes and parking spots and government fleet purchases, and taxpayers help pay for every electric car on the road.

What happens when the credits go away? When Hong Kong slashed a tax break worth roughly $55,000 for a Tesla in April, its sales ground to a halt. In Georgia, electric vehicle sales plummeted 80% the month after a $5,000 tax credit was repealed.

Tesla will find plenty of wealthy niche buyers for its high-priced cars once it exhausts its credits. But for electric vehicles as a whole, hybrids have a sobering lesson. From 2005 to 2010, some hybrid buyers enjoyed a $3,500 tax credit. Sales kept rising after the credit expired, peaking at 487,000, or 3.1% of total vehicles, in 2013, according to Edmunds.com, when gasoline averaged $3.51 a gallon. A surge in oil supply, thanks to fracking, caused gasoline prices to plummet to $2.36 a gallon this year, and hybrids’ market share has dropped to just 2.1%.

Many optimists think falling battery costs mean electric vehicles (EVs) will inevitably displace the internal combustion engine (ICE). Last week, Bloomberg predicted electric cars would become “price competitive” with ICE cars in eight years without subsidies.

But such scenarios hinge not just on the cost of batteries but on the price of oil and the efficiency of competing vehicles. Economists Thomas Covert, Michael Greenstone and Christopher Knittel, in an article for the Journal of Economic Perspectives, estimate that at the current battery cost of $270 per kwh, oil would have to cost more than $300 a barrel (in 2020 dollars) to make electric and gasoline equally attractive. If battery costs fall to $100, as Tesla Founder Elon Musk has targeted, oil would have to average $90.

That could happen. But optimists “overlook the compensating effect of incumbent technology,” says Kevin Book, of ClearView Energy Partners, an advisory firm. He notes, for example, the spectacular decline in natural gas prices that hydraulic fracking has made possible. Global oil reserves have repeatedly defied predictions of shrinkage as industry innovation expands what can be recovered. And internal combustion engine efficiency typically rises 2% a year.

ClearView says that in an optimistic scenario, where battery costs fall 10% a year starting now and gasoline begins at $5 a gallon, electric vehicles will be competitive in five years. If battery costs fall just 5% a year and gasoline starts at $2.25, it will take more than 20.

This would still be a step forward for the climate, but by how much depends on other factors. Electric vehicles are meant to be recharged at night. Economists Joshua Graff  Zivin, Matthew Kotchen  and Erin Mansur note in a 2014 article in the Journal of Economic Behavior and Organization that night is when electricity is most likely to come from burning coal. They estimate electric vehicles account for more carbon dioxide per mile than existing cars in the upper Midwest, where coal-fired plants are more prevalent, and more than comparable hybrids in most of the country.

Federal regulators further dilute the carbon-reduction impact by giving manufacturers added credit for each electric vehicle, when complying with average fuel efficiency standards. Thus, every electric vehicle sold allows a manufacturer to sell a few more gas guzzlers and still comply.

These subsidies have clearly accomplished one goal: They’ve accelerated electric vehicle technology innovation when the private market had little incentive to invest. Yet they may not be the most efficient way to combat carbon emissions. A carbon tax, for example, would incentivize conservation and alternative fuels regardless of oil prices.

Since that’s unlikely for now, Mr. Greenstone and Sam Ori, both of the University of Chicago’s Energy Policy Institute, and Cass Sunstein, of Harvard University, suggest scrapping the current array of fuel efficiency standards and assigning manufacturers a tradable emissions cap for each vehicle. This would put alternatives to electric cars, such as more efficient gasoline or diesel engines, on a level playing field. Just in case electric vehicles don’t meet their heady expectations, the world should spread its bets.

Appeared in the July 13, 2017, print edition as ‚Electric Cars Are the Future? Not So Fast.‘

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