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Buying an electric car, saving the planet? Not enough

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It’s good to see legislative progress in addressing the effects of climate change, as evidenced by the agreement announced last week between Sen. Joe Manchin and Majority Leader Chuck Schumer. But in some respects the proposal falls short. In particular, subsidies for the purchase of electric vehicles may not be the best way to tackle global climate change.

The bill provides a maximum tax credit of $7,500 for a new electric vehicle, extended from the status quo, and a new credit of $4,000 for the purchase of a used vehicle.

The first problem should be obvious from recent experience with the stimulus and the resulting higher rates of inflation: when you give money to consumers, it sometimes leads to higher prices. The risk is that these subsidies lead to more expensive electric vehicles, not more electric vehicles.

Currently, the electric vehicle market is facing certain constraints on the supply side. If you’re ordering a Tesla right now, for example, you might have to wait months. Ford and General Motors produce electric vehicles, but that’s not the primary focus of their production. At the macro level, the world does not have sufficient battery capacity to achieve large-scale conversion to electric vehicles.

An alternative approach could focus on supply rather than demand. If policy could make EV batteries cheaper, more efficient, and more available, EV prices would fall and consumers would buy more of them. Additionally, the effects would be global, rather than limited to the United States.

Of course, it’s possible that increased demand for electric vehicles will help drive down battery prices and expand supply. But the simplest and perhaps most likely outcome is that in the short term, the prices and costs of electric vehicles will rise. US consumers will bid on scarce inputs from the rest of the world. There are long lead times to establish new sources of lithium, and a subsidy that won’t last forever (under the bill, it would expire in 2032) might not be enough to provide the necessary momentum. Supporting new lithium supply technologies might be a better strategy.

Another motivation for subsidizing electric vehicles could be to stimulate demand, encourage production and incentivize automakers to find ways to cut costs. This can happen, but note that a country with rapidly falling unit costs in a particular industry is a country with a small number of dominant suppliers, perhaps only one or two. (The company that produces the most will end up with the lowest costs and a strong market position.) If the EV market is somewhat monopolized, the benefits of subsidies will flow more to companies than to customers.

I am not bothered by this result myself. But that’s not how the policy is announced. And while companies reap most of the benefits in the form of higher profits, electric vehicles might not become as popular.

The bill also has mercantilist elements, which are not ideal from a climate perspective. Subsidies only apply to North American vehicles, and battery components must be increasingly American over time, not allowing Chinese components. So, to the extent that the policy is effective, it will steer the market toward American products.

This is not a surprising feature of US law. Still, American producers may not be best placed to solve the problem of affordable and scalable electric vehicles. Is it so smart to push critical growth in electric vehicle production into a relatively high-wage market?

Some commentators have suggested that Korean automakers Hyundai and Kia would be the leaders in electric vehicle production. But they may see their greatest innovation and productivity gains outside of North America, perhaps in Europe or India.

Keep in mind that climate change is a global issue; cutting US emissions won’t do much. This legislation may well lead to lower emissions in the United States, but make them slightly more difficult to achieve in the rest of the world, thus reducing its effectiveness.

It’s no mystery why US law would have provisions that subsidize US consumers and businesses. But political expediency is an explanation, not an excuse. Climate change is a global problem that requires global solutions.

More from Bloomberg Opinion:

• Manchin U-turn gives cleantech a boost: Liam Denning

• Why are electric vehicles getting bigger and heavier? : Chris Bryant

• Does anyone actually make electric vehicles? : Anjani Trivedi

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the Marginal Revolution blog. He is co-author of “Talent: How to Identify the Energizers, Creatives and Winners in the World”.

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