California’s EV Fetish

Ken Green
June 20, 2012

By Kenneth Green

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Key Points:

• California has led the modern crusade for vehicle electrification
• Experience suggests that even with modern technology, electric cars are not capable of satisfying consumer desires
• Subsidies given to promote electric car adoption are wasteful, regressive, and unethical
• California regulators should let markets, not planners, determine the course of vehicle electrification

Introduction

Environmentalists have long wished for the electrification of passenger vehicles. As Professor Vaclav Smil points out in Energy Myths and Realities, both Thomas Edison, and Henry Ford labored mightily to make that happen:¹

Few people believed more strongly in the eventual dominance of electric cars than Thomas Edison, the inventor of the modern electric system. This conviction brought about one of the most consequential pairings in the history of technology. Henry Ford was hired as the chief engineer at Detroit Edison Illuminating Company…

Edison would, in fact, spend more than 10 years trying to develop a battery that could compete with a gasoline engine. Alas, he didn’t find one. That did not dampen enthusiasm for electric cars, however.
As Robert Bryce points out in Power Hungry  “All-electric cars are The Next Big Thing. And they always will be.”² Bryce goes on to chronicle the 100+ year search for the all-electric car that can compete, on a level playing field, with internal-combustion engines, and finds a long history of failure. A few examples of the false starts that litters the history of electric cars is illustrative:

1911: The New York Times declares that the electric car “has long been recognized as the ideal solution” because it “is cleaner and quieter and “much more economical.”

1915: The Washington Post writes that “prices on electric cars will continue to drop until they are within reach of the average family.”

1979: The Washington Post reports that General Motors has found “a breakthrough in batteries” that “now makes electric cars commercially practical.” The new zinc-nickel oxide batteries will provide the “100-mile range that General Motors executives believe is necessary to successfully sell electric vehicles to the public.”

But the long history of failure involving electric cars has never dimmed the enthusiasm of environmental regulators, particularly in California, which mandated the adoption of all-electric cars in California back in 1990, under the guise of a “Zero-Emission Vehicle (ZEV) mandate.³ While ostensibly a performance standard based on vehicle emissions, there were no vehicles other than all-electric cars that could satisfy the ZEV mandate at the time: it was a de facto electric car standard from the beginning.

ZEV Mandate

The Zero-Emission Vehicle mandate, enacted in 1990, required that by 1998, 2% of the vehicles sold in the state by large automakers had to be zero-emission (aka electric) vehicles.⁴ That mandate was set to increase to 5% of vehicle sales by 2001, and 10% by 2003.

But it was quite obvious that the technology to satisfy the ZEV mandate was not forthcoming from manufacturers, and by 1996 the mandate was modified to allow automakers to sell more conventional (but super-low-emitting) vehicles in order to get credit for meeting their ZEV mandate targets. In 2001, the mandate was further modified, to allow large automakers to satisfy their obligations if they sold just 2% “pure” zero-emission vehicles, 2% “advanced technology partial zero emission vehicles PZEVs (aka, natural gas or hybrid-electric vehicles), and 6% conventional PZEVs, which are internal combustion vehicles (such as a Honda Accord) that meet a “super ultra low emission vehicle standard.”⁵

Most recently, the ZEV mandate was modified again, and now mandates that “at least 15.4 percent of all cars sold by any major automaker doing business in California will have to be either fully electric, a plug-in hybrid or be powered by a hydrogen fuel cell by 2025.”⁶

The limitations of electric vehicle technology

But electric-vehicle technology is still unable to satisfy the demands of consumers. Consider the Chevy Volt. When it was first announced, the price estimate from General Motors (GM) was speculated to be $30,000. That soon jumped to $35,000. The actual sales price for the Volt, at this writing, is just under $40,000.⁷ The all-electric Nissan Leaf, with a limited range of about 73 miles per charge sells for about $35,000.⁸

Hybrids are also more expensive to insure. Online insurance broker Insure.com shows that it costs $1,308 to insure a Honda Civic but $1,486 to insure a Honda Civic Hybrid.⁹ Similarly, it costs $1,270 to insure a Toyota Camry¹⁰ but $1,517 to insure a Toyota Camry Hybrid; $1,619 to insure a Chevrolet Volt but only $1,267 for the same-size gas-powered Chevrolet Cruze; and $1,512 for the Nissan Leaf but only $1,240 for the comparable Nissan Versa.¹¹

What explains the higher rates? According to the Mitchell Industry Trends Report, hybrids cost more to insure because their parts are more expensive and repairing them requires specialized labor, thus boosting the after-accident payout.¹² Even conventional small cars are more expensive to insure than larger vehicles, because the former are involved in more accidents that produce extensive injuries. According to a recent article in The Wall Street Journal, the same driver would pay $412 more to insure a Honda Civic compact that gets 36 mpg on the highway than he would to insure a Honda CR-V (Honda’s mini-SUV) that gets 27 mpg.¹³

And sales are lackluster, to say the least. The figure below shows the volume of sales of the GM Volt and Nissan Leaf in perspective.¹⁴

Lack of environmental benefits

It has been known since early in the history of California’s electric-car fetish that ZEV mandates to not necessarily equate to improved air quality. As researchers with Resources for the Future noted back in 2001:¹⁵

California’s decision to mandate the sale of zero-emissions vehicles (ZEVs) as a means of improving air quality in the state looked like a clear victory for the environment. However, technology breakthroughs have proven elusive, resulting in ZEVs with high costs and poor performance. If the costs of producing ZEVs and subsidizing their purchase are spread across California’s new car market, consumers are likely to respond to the price increases by holding onto their older vehicles, which have much higher emissions rates. Even a small increase in their use will generate extra emissions that will more than offset emissions reductions from ZEVs.

The researchers explain further that:

The electric car requirement will slightly reduce emissions from the average new car sold in California. However, the program will also raise the prices of both electric and non-electric new cars sold in the state as companies seek to recover the costs of developing and producing electric vehicles and the subsidies needed to get consumers to buy them. It is the economic response of Californians to these higher prices that will turn CARB’s good intentions into extra tons of emissions. Californians are likely to purchase fewer new cars and to continue driving their old cars longer. If the cost of producing electric cars, as estimated by CARB, is spread across the entire new car sales base in California, previous experience with the consumer response to higher new car prices suggests that total new car purchases will fall by 2%–3%, with an offsetting increase in the retention of older cars in the fleet. While the consumer response is small in terms of numbers of vehicles, the emissions impacts will be substantial, because old cars have much higher emission rates than new ones. Yet a recent CARB staff analysis, which suggests that the ZEV program will very modestly reduce emissions from the vehicle fleet, simply ignores this consumer response and its emissions implications. Once this response is properly taken into account, CARB’s own emissions models suggest that the emissions increase resulting from more intensive use of older cars will overwhelm the expected emissions reductions from new ZEVs.

If anything, this dynamic is even more likely today, as the regular vehicle fleet is far cleaner than it was in 2002.

And then, there’s the question of what energy you use to charge up the cars. As Vaclav Smil documents, using our current mix of standard technologies would require us to produce a great deal of additional electricity, with its own emissions. Smil calculates that charging electric cars with the mix of energy we used in 2008 would:

…offer no primary energy savings and no-carbon emissions advantage when compared to the alternatives of a highly efficient gasoline car fleet or the large-scale adoption of hybrid vehicles – unless, of course, all of the electricity consumed by the all-electric vehicles were generated by renewable conversions rather than by the current mix of generation relying on coal, natural gas, nuclear fission, and water power.”

And while California policy makers no doubt believe that is how they will power their cars, Smil and others have doubts. As Benjamin Zycher explains in a monograph for the American Enterprise Institute, the renewable energy agenda, which is already faltering, is likely to encounter problems in the near future:¹⁶

The market difficulties faced by renewables are likely to be exacerbated by ongoing supply and price developments in the market for natural gas, which will weaken further the competitive position of renewable power generation.

The problem with subsidies

In order to promote sales of electric or partially-electric vehicles, federal and state subsidies have flowed like water. At the Federal level, a tax credit for plug-in electric vehicles was first enacted in the Energy Improvement and Extension Act of 2008, and was later modified in the American Recovery and Reinvestment Act of 2009.¹⁷ The current tax credit is available for plug-in electric vehicles purchased subsequent to December 31, 2009, that meet the following qualifications:¹⁸

• Draw propulsion using a traction battery
• Have at least four kilowatt hours of capacity
• Use an external source of energy to recharge the battery
• Have a gross vehicle weight rating of up to 14,000 lbs
• Meet specified emission standards.

The credit is a minimum of $2,500 for 4kwh capacity, and increases by an additional $417 for each kilowatt-hour of battery capacity over 5 kwh, where the portion of the credit determined by battery capacity cannot exceed $5,000. Therefore, the maximum credit is $7,500.¹⁹ Both Nissan Leaf and Chevy Volt qualify for the maximum credit of $7,500, whereas the Toyota Prius Plug-in Hybrid only qualifies for a $2,500 credit due to its smaller battery capacity of 5.2 kWh.²⁰ Once 200,000 qualified plug-in electric drive vehicles have been sold by any manufacturer for use in the U.S., the credit for that manufacturer will begin to be phased out in the following calendar quarter.²¹

ARRA also authorized federal tax credits for converted plug-ins, though the credit is lower than for new PEVs. The credit is 10% of the cost of converting a vehicle to a qualified plug-in electric vehicle, with a maximum credit of $2,500, and applied to conversions made between February 17, 2009 and December 31, 2011. ²²

State subsidies are also available in California: ²³

• CARB funded Clean Vehicle Rebate Project (CVRP) with $4.1 million through Assembly Bill 118 that was signed by Governor Schwarzenegger in October 2007.
• HOV Lane Exemption: Compressed natural gas (CNG), hydrogen, electric, and plug-in hybrid electric vehicles (PHEVs) may use HOV lanes regardless of the number of passengers.
• Vehicle Purchase Incentives in Riverside, CA: City of Riverside residents and employees are eligible to receive a rebate of up to $2,000 for new qualified and $1,000 for used qualified natural gas or hybrid electric vehicle purchased from a Riverdale dealership.
• Electric Vehicle Supply Equipment (EVSE) Incentive - Bay Area: Up to 2,750 residents who purchase a new plug-in electric vehicles and install Level 2 (220 volt) home chargers will receive purchase incentives from the Bay Area Air Quality Management District (BAAQMD); after December 1, 2010.
• Alternative Fuel and Advanced Vehicle Rebate - San Joaquin Valley: The San Joaquin Valley Air Pollution Control District (SJVAPCD)’s Drive Clean! Rebate Program offers first-come, first-served rebates of up to $3,000 for qualified natural gas and plug-in electric vehicles to residents and businesses located in the SJVAPCD on or after March 15, 2012.
• Low Emission Vehicle Incentives- San Joaquin Valley: The San Joaquin Valley Air Pollution Control District’s REMOVE II program provides funding in the amount of $1,000 to $3,000 per vehicle (according to the emissions certification level and size of the vehicle) for the purchase of low emission passenger vehicles, light-duty trucks, small buses, and trucks with gross vehicle weight ratings of 14,000 pounds or less, that are powered by alternative fuel or electric or hybrid electric engines/motors.
• Low Emission Vehicle Technical Training - San Joaquin Valley: REMOVE II also includes an Alternative Fuel Vehicle (AFV) Mechanic Training Component that provides incentives for alternative fuel technologies training.

But subsidies are bad policy.

First, subsidies subvert the efficient functioning of the market, which is our only effective mechanism for matching supply with demand. Free trade in a given good is, as economics tells us, the only way to determine efficiently how much of that good is desirable at a given price.

Just as Soviet planners could not simply determine how many shoes of what sort people would want in five years’ time, politicians cannot determine how many kilowatt-hours Americans will want in five years, nor the price they will be able to pay without sacrificing wealth to inefficiency. The idea that it could make such predictions is, as Friedrich Hayek, the Nobel Prize-winning economist, observed, the fatal conceit of government.

Second, subsidies create a fertile garden for rent-seekers, who connive to get a share of the pie by hook and often by crook. Rent-seeking happens when people who cannot sell a good in a free market tap the coercive and redistributionist force of government to lever their uncompetitive good into the market at the public’s expense. Rather than contribute to overall social welfare by giving consumers the best goods at the lowest cost, rent-seekers undermine social welfare by foisting inferior or overpriced goods on to the market while taking money that could be used for important purposes.

Third, subsidies create a vehicle for government manipulation by special interests and campaign donors at the general public’s expense. Does anyone really think that environmental groups and the wind and ethanol industries were unaware of the potential windfall a Democratic Congress would bring? Does anyone really think they did not donate to political campaigns accordingly?

Fourth, subsidies are often inequitable. High petrol taxes create an incentive for new fuel-efficient cars--in a sense creating a subsidy for vehicles that do a lot of miles to the gallon. But only people in higher economic brackets can afford new cars; poorer people are left to drive less efficient vehicles and spend more on petrol taxes. When the California government wanted to subsidize the last generation of electric vehicles, it offered more than $8,000 to people who leased General Motor’s EV1. But the only people who could do so were households that earned more than $100,000 annually and had a regular petrol-powered car as their primary mode of transportation.

Finally, subsidies pave the way for adverse consequences that inevitably result when legislators decide that their few hundred heads are wiser than the nearly infinite number of nuanced economic decisions made by their millions of constituents.

As The Economist magazine noted, government efforts to protect the environment are rife with unintended consequences. Mandating fuel-efficient vehicles led people to drive more, not less. Recycling plastic often consumes more resources than it saves. Manufacturers receive subsidies for selling flexible-fuel vehicles that most people never run on anything but gasoline. That allows the companies to sell SUVs with their ruinous miles to the gallon and still maintain proper “average” fuel economy. The list is endless.

Conclusion

The California ZEV mandate has been strongly criticized by John D. Graham, former Administrator of the Office of Information and Regulatory Affairs at the United States Office of Management and Budget. In 2012, Graham testified to Congress that:²⁴

• The case for the California ZEV rule is certainly questionable, given the force of the following arguments:
• California regulators cannot slow global climate change to a meaningful degree unless China and India control their greenhouse gas emissions but the California ZEV program does not -- and cannot -- cover China and India; The Obama administration, through a joint rulemaking of EPA and DOT, has already mandated a sharp reduction in greenhouse gases from new cars and light trucks for model years 2017 to 2025 through a performance standard, a numeric standard based on carbon emissions that allows automakers to undertake some averaging of low-emitting and high-emitting vehicles (EPA-NHTSA, 2011);
• The joint EPA-DOT rule already provides generous compliance incentives for manufacturers who offer ZEVs (e.g., a ZEV’s “upstream” emissions at the electric power plant are ignored and each ZEV may be counted more than once in the compliance process) to supplement the federal government’s generous $7500 income tax credit to purchasers of ZEV-like vehicles;
• The California ZEV program may not accomplish additional greenhouse-gas control (beyond the control achieved by the EPA-DOT joint rule) because any extra ZEVs produced and sold due to California’s rule will be offset in the production plans of automakers by extra sales of more high-emitting vehicles in the 50 states covered by the EPA-DOT rule; and
• The California ZEV program, by forcing automakers to sell more expensive vehicles that are cheaper to operate, will exacerbate greenhouse gas emissions due to two perverse behavioral responses: some consumers will hold on to their old, high-emitting vehicles longer than they would otherwise, and those consumers who do purchase an expensive ZEV will drive them more miles each year because electricity is cheaper than gasoline.

Californians naturally want cleaner air, but the ZEV Mandate is not the way to attain it. The ZEV Mandate will harm Californians by increasing the cost of their mobility, without offering compensatory benefits in terms of improved air quality. It may, indeed, slow the pace of air quality improvements, putting people’s health at risk. It’s time to pull the plug on electric vehicle mandates.

Kenneth P. Green is Senior Fellow at the Pacific Research Institute, and blogs for both AEI and the Pacific Research Institute. You can follow him @KennethPGreen.

Additional Resources

ZEV Mandate History: www.arb.ca.gov/msprog/zevprog/zevregs/zevregs.htm

EV Timeline www.pbs.org/now/shows/223/electric-car-timeline.html

Endnotes

1    Smil, V. 2010. Energy myths and realities: bringing science to the energy policy debate. AEI Press, Washington, D.C.
2    Bryce, R. 2010. Power hungry: The myths of “green” energy and the real fuels of the future. PublicAffairs, New York, NY.
3    2009. Timeline: History of the Electric Car. NOW on PBS. Available at www.pbs.org/now/shows/223/electric-car-timeline.html (accessed 7 June 2012).
4    California Environmental Protection Agency, California Air Resources Board. 2011. Zero-Emission Vehicle Legal and Regulatory Activities – Background. Available at www.arb.ca.gov/msprog/zevprog/background.htm (accessed 7 June 2012).
5    California Environmental Protection Agency, California Air Resources Board. Driveclean. Factsheet. Available at www.arb.ca.gov/msprog/zevprog/factsheets/driveclean.pdf (accessed 7 June 2012).
6    Clegern, D. and Young, S. 27 Jan. 2012. California Air Resources Board Approves Advanced Clean Car Rules. News Release 12(05). Available at www.arb.ca.gov/newsrel/newsrelease.php (accessed 7 June 2012).
7    2012. Best Card and Trucks: 2012 Chevrolet Volt. U.S. News. Available at usnews.rankingsandreviews.com/cars-trucks/Chevrolet_Volt/ (accessed 7 June 2012).
8    Voelcker, J. 2012. Nissan Leaf History. The Car Connection. Available www.thecarconnection.com/cars/nissan_leaf (accessed 7 June 2012).
9    Danise, A. 2011. The least expensive 2011 hybrids to insure. Insure. Available at www.insure.com/car-insurance/hybrid-insurance-rates.html (accessed 7 June 2012).
10    For Toyota Camry LE with 4 cylinders
11    Pierce, E. 2012. Car insurance comparison: The most and least expensive 2012 vehicles to insure. Insure. Available at www.insure.com/car-insurance/car-insurance-comparison.html (accessed 7 June 2012).
12    Horn, G. 2010. Quarterly Feature: Are Hybrids as Green When it Comes to Their Claims Costs? Mitchell Industry Trends Report 10(3): 3-5.
13    McQueen, M.P. 23 Oct. 2008. Higher Insurance Costs Erode Fuel Savings on Small Cars. The Wall Street Journal. Available at online.wsj.com/article/SB122471188978360023.html (accessed 7 June 2012).
14    5 June 2012. May 2012 Dashboard. HybridCars. Available at www.hybridcars.com/news/may-2012-dashboard-46746.html (accessed 7 June 2012).
15    Gruenspecht, H. Winter 2001. Zero Emission Vehicles: A Dirty Little Secret. Resources for the Future 142: 7-10.
16    Zycher, B. 2011. Renewable electricity generation: Economic analysis and outlook. AEI Press, Washington, D.C.
17    U. S. Department of the Treasury, Internal Revenue Service. 2009. New Qualified Plug-in Electric Drive Motor Vehicle Credit. Internal Revenue Bulletin 2009-48. Available at www.irs.gov/irb/2009-48_IRB/ar09.html (accessed 7 June 2012).
18    U. S. Department of Energy. 2011. Federal & State Incentives & Laws. Alternative Fuels & Advanced Vehicles Data Center. Available at www.afdc.energy.gov/afdc/laws/search (accessed 7 June 2012).
19    U. S. Department of the Treasury, Internal Revenue Service. 2009. New Qualified Plug-in Electric Drive Motor Vehicle Credit. Internal Revenue Bulletin 2009-48. Available at www.irs.gov/irb/2009-48_IRB/ar09.html (accessed 7 June 2012).
20    Voelcker, J. 14 Dec. 2009. Toyota Prius Plug-In Hybrid On Sale in 2011, Less Than $10K More. Green Car Reports. Available at www.greencarreports.com/news/1040132_toyota-prius-plug-in-hybrid-on-sale-in-2011-less-than-10k-more (accessed 7 June 2012).
21    U. S. Department of Energy. 2011. Federal & State Incentives & Laws. Alternative Fuels & Advanced Vehicles Data Center. Available at www.afdc.energy.gov/afdc/laws/search (accessed 7 June 2012).
22    U. S. Department of the Treasury, Internal Revenue Service. 2012. Plug-In Electric Vehicle Credit (IRC 30 and IRC 30D). Available at www.irs.gov/businesses/article/0,,id=214841,00.html (accessed 7 June 2012).
23    U. S. Department of Energy. 2011. Federal & State Incentives & Laws. Alternative Fuels & Advanced Vehicles Data Center. Available at www.afdc.energy.gov/afdc/laws/search (accessed 7 June 2012).
24    Graham, J. 21 March 2012. Office of Information and Regulatory Affairs: Federal Regulations and Regulatory Reform under the Obama Administration. Testimony Prepared for the House Judiciary Committee’s Subcommittee on Courts, Commercial and Administrative Law. Available at judiciary.house.gov/hearings/Hearings%202012/Graham03212012.pdf (accessed 7 June 2012).