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.
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 In Georgia, electric vehicle sales plummeted 80% the month after a $5,000 tax credit was repealed.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.
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