California will hold a hearing this week on offering a $4,500 subsidy for each pure electric vehicle sold in the state, up from the current $2,500, even as customers from Tesla Inc. and General Motors Co. face the loss of even bigger federal credits.
The federal government now offers a $7,500 tax credit on electric vehicles sold. The credit is designed to start ratcheting downward once the companies have grown enough to sell a total of 200,000 vehicles each. Tesla passed this threshold in July and GM is getting close.
The state is able to consider an increase in its electric-car subsidy partly because revenue is becoming available as companies buy more credits to comply with the state’s Low Carbon Fuel Standard, said Dan Sperling, a University of California Davis transportation professor who is also a member of the Air Resources Board. At this week’s hearing, the board will consider requiring oil companies to cut carbon intensity by 20 percent by 2030, compared with 2010 levels, from a 5 percent reduction mandated this year.
At meetings Thursday and Friday, the Air Resources Board will also look at heftier subsidies for fast-charging facilities for electric cars and hydrogen stations for fuel-cell vehicles, Sperling said. The board also may mandate that urban transit systems buy only battery-only or hydrogen-powered buses by 2030, he said. The state’s electric utilities have emerged as enthusiastic backers of such measures, Sperling said, as rate-payer funded charging stations provide a new source of revenue.
According to the article, the state of California has decided to raise subsidies for electric cars by $2000, from $2500 to $4500 so that more people will want to buy electric cars. The state is also planning to increase subsidies for charging stations for electric cars, a complementary to electric cars.
A subsidy is a form of financial aid or support provided to an institution, business, or individual, generally to reduce the production cost and price of a product and increase output and sales. Subsidies are often provided to a firm that produces merit goods, which are socially desirable but under-provided by market and under-consumed by consumers.
The figure illustrates the market for electric cars in California. On the graph, the marginal social benefit (MSB) curve is above the marginal private benefit (MPB) curve, meaning there are positive externalities from production and consumption. The government believes that electric cars are under-consumed. This is most likely due to low income of consumers, or the consumer ignorance about the benefits of electric cars. Because MSB is greater than MSC, electric cars are under produced, creating market failure. On the graph, potential gain in welfare is represented by “a” and “b”, as “a+b” is positive externality not experienced with free market equilibrium. The new, optimum equilibrium creates additional consumer and producer surplus: “a” represents the consumer surplus and “b” is the producer surplus. Both gains in surplus can only be achieved if the number of electric cars produced and consumed reaches the socially optimum quantity. To achieve optimum social quantity of production and consumption, the government has chosen to subsidize the consumption of electric cars, solving the problem of under-consumption and production.
When the consumption of electric cars is subsidized, the demand or the MPB curve shifts to the right, making MPB equal to MSB, increasing demand for electric cars, therefore eradicating under-consumption. This increase in demand also causes the demand curve to cut the supply curve at a higher point, increasing the quantity of electric cars supplied, shifting the free market equilibrium to the new optimal equilibrium. This is beneficial for society as electric cars are merit goods, meaning it creates positive externalities when consumed by society. Electric cars take cheap fuel, driving an electric car for 100 miles is almost 60 percent cheaper than driving a petrol-fueled car for the same distance. Because of this, the increased consumption of electric cars can save society a lot of money on daily fuel expenditure. The increased subsidy on electric car charging stations, as mentioned in the article, will also greatly decrease fuel costs of electric cars, further improving living standards. Electric cars also do not produce poisonous gases. Emissions from car exhausts cause air pollution, which can lead to various sicknesses. If sales of electric cars increase, cases of pollution-related sicknesses will decrease, which will allow the government to decrease expenditure on public healthcare. Electric cars also promote the use of electricity, which decreases fossil fuel dependency, allowing society to be more environmentally friendly. An increase in demand for electric cars will increase the quantity of electric cars produced, because the production of electric cars requires human labor, the increased demand will create jobs, reducing unemployment rate and boosting economic growth. The decreased unemployment rate also allows the government to spend less tax revenue on unemployment benefits.
However, to subsidize the purchase of electric cars, the subsidies come from revenue earned from cap-and-trade, which can be limited, as well as the tax collected from businesses and individuals. Tax expenditure that could have been spent on funding public transport, healthcare, or education is spent on subsidies for electric cars, creating opportunity costs. Sometimes making public transport more integrated and easier-to-access is more efficient than subsidizing electric cars, this is because as public transport becomes more developed, more people use will public transport and average operational costs will decrease. Even if the increased production of electric cars creates new jobs, it also puts petrol car producers unemployed. Some would also argue that electricity used to power electric cars are made from fossil fuels, which negates its environment-saving benefits.
In conclusion, I believe that the government should continue with subsidizing electric cars in California, because they run on cheap fuel, don’t produce poisonous gases, decreases fossil fuel dependency, and creates jobs, all serving to maximize positive externalities and reducing health issues, helping to protect the environment and improve living standards in California. Though there are certain drawbacks, I believe that providing subsidies would be a well-founded and effective decision for California.