EVs, CAFE Standards, Gas Tax, Public Transportation
The right goal for reducing the greenhouse gas (GHG) emissions in the transportation sector can be explained in a formula:
(GHGs/Gas-Powered Mile) x Total Gas-Powered Miles = Total GHG.
There are three ways to reduce total GHG in the transportation sector:
- CAFE Standards increase the gas-powered miles that come from each gallon of gas, while the GHGs from each gallon of gas stay constant. As an example, if CAFE produces a 10% gain in fuel efficiency and if total gas-powered miles driven stays constant, then GHGs drop by 10%.
- People to telecommute or take public transit, perhaps as a result of gas taxes or attractive public transportation options. Gas-powered miles go down, so GHGs go down (even if the ratio of GHGs to gas-powered mile stays constant).
- Electric vehicles replace gas-powered vehicles, which reduces gas-powered miles go down. Similarly more hybrid vehicles, which replace a portion of gas-powered miles driven with electric miles driven, would also reduce the gas-powered miles driven.
The formula demonstrates that it is possible, and desirable, to determine the equilibrium between a gas tax and a subsidy for EVs. As an example, if a state gas tax collecting $10 million reduced GHG by the same amount as a $10 million subsidy for EVs (or electric miles driven by a hybrid), then the only difference is who pays. In the case of the gas tax, it is the driver. In the case of the EV subsidy, it is the taxpayer. The gas tax is probably regressive; the EV subsidy, progressive.
The Three Best EV Subsidy Options
The next question is how to maximize the reduction in gas-powered miles that an EV subsidy could produce. The goal is captured in the following formula:
Gas-Powered Miles Reduction/$ = GHG reduction.
So what are the ways that an EV subsidy can lead optimally to gas-powered miles reduced? At least the following methods are possible:
- Award the subsidy per electric mile driven, on the assumption that any such mile driven in an EV substitutes for a gas-powered mile.
- Award the subsidy to vehicles according to the likely number of miles they will drive. For example, a taxi cab will be driven 70,000 miles a year in New York City, whereas the normal passenger car is used 10,000 miles a year. Cars used primarily for ride-hailing services (like Uber and Lyft) are similarly high mileage compared with an average passenger vehicle. Of course the vehicles with high annual usage are better targets for subsidies, as they displace more gasoline use.
- Award the subsidy by auction, picking the winner according to who shows the biggest number of electric miles substituting for gas-powered miles.
A few tweaks in EV subsidy policy can have large effects on emissions in the transportation sector. The current policy of giving the same subsidy to an EV that mostly sits in a garage to an EV that is driven over 70,000 miles per year doesn’t make much sense. The expense to the taxpayer is the same, but the miles (and associated GHGs offset) are very different. If we want EVs to contribute to lower GHG emissions, we would do better to target subsidies to cars that have high annual mileage.
Financing EV Charging Stations Through Auctions
As to charging stations, unfortunately every charging station installed anywhere today creates direct negative net present value. (There may be indirect benefits, such as more time spent in a retail store, or increased employee loyalty.) Charging stations are complementary products to EVs. They are like shoestrings for shoes—necessary but not valuable in and of themselves. They impose a cost that has to be paid by someone; they are not, in today’s market, a productive investment.
The goal of any economic policy is to reduce costs for the same output, or to reduce the ratio of cost to output. That is tantamount to saying that the goal of policy is to increase productivity. Everyone agrees that national income will not go up over the long run unless productivity goes up.
Therefore the goal as to charging stations is to make sure the smallest possible number are installed that nevertheless suffices to make EVs useful. (One might argue that charging station grids should compete to reduce costs, but where every such grid is net present value negative then the first will be a natural monopoly. Who would enter the market in order merely to lose less money than the first stations installer?) As a result, the right policy is for the subsidy provider to design the minimal station network necessary to make EVs useful. No one needs two pairs of shoestrings for the same shoes; no one needs more than the minimum necessary charging stations.
Whether the subsidy provider is the government, the utility, or the EV industry, in any case the provider should design the optimal network and award a license to build it by means of an auction that selects the lowest cost provider as the winner of the necessary subsidy.