Zero-emission vehicle subsidies and home heating tax exemptions: both fail the test

Two recent announcements—one by the Liberals and one by the Conservatives—show that neither party has cornered the market on bad ideas for spending taxpayers’ money. In the 2019 budget, the government announced a subsidy of up to $5,000 to encourage consumers to purchase electric-battery or hydrogen fuel-cell vehicles. Canada already has experience with these types of incentives, including programs offered by the governments of British Columbia, Ontario (recently cancelled), and Quebec. Unfortunately the research shows these programs at best provide a very inefficient way to encourage reductions in greenhouse gas emissions, and at worst they may actually increase overall emissions. In a paper published in 2017, Ian Irvine, an economics professor at Concordia University, showed that subsidies for zero-emission vehicles (ZEV) work at cross-purposes with Canada’s CAFE regulations (Corporate Average Fuel Economy) on the sale of light-duty vehicles. Under these regulations, when a manufacturer sells a ZEV, it receives emission credits in excess of the reduction achieved. As a result, a sale of an additional ZEV creates room for the company to more than offset the emissions saved, and therefore we should expect to see total GHGs increase as a result of the sale of a ZEV, rather than decrease. We might think this problem is easily solved by changing the CAFE regulations. Unfortunately, even in the absence of these regulations, the research shows that ZEV subsidies are an extremely inefficient way to meet Canada’s climate goals. First, the subsidies are plagued by the problem of free-riding, as people who were going to purchase ZEVs anyway are allowed to claim the subsidy. Economists estimate that the share of such free-riders is large—as much as 50 per cent. For these individuals, the subsidy payment does not contribute to the government’s goal. Second, ZEV subsidies suffer from a cost-effectiveness problem. Germain Belzile and Mark Milke, of the Montreal Economic Institute, have estimated that electric vehicle subsidies in Quebec and Ontario have reduced emissions at a cost of $288 and $523 per tonne of GHGs respectively. In contrast, the price of tradable carbon permits under the Western Climate Initiative, linking Quebec and California, came in at $21 per tonne of GHG at the most recent auction (Feb. 20). Since this price is set in a competitive market, it reflects the benchmark cost at which households and businesses can reduce their emissions. Based on Belzile and Milke’s numbers, achieving this cost per tonne through ZEV subsidies would require limiting the size of the incentive to approximately $600 per purchase—a number so small it would not likely motivate many consumers to change their purchase decisions. Third, subsidies need to be paid for with tax dollars. Unfortunately, taxes create distortions in the economy over and above the value of the revenues raised for government. Economists measure the cost of these distortions, and typically they are large—in the range of 30 cents or more for each dollar of revenue raised. This means that the true cost of the subsidies is much higher than the face value. For all these reasons, we can only conclude ZEV subsidies represent a waste of taxpayers’ money. Instead, we should be patient and let the carbon tax work its magic, as businesses and households seek the most cost-effective ways to reduce GHGs. Meanwhile, on March 6, Conservative Leader Andrew Scheer announced that, if elected, a Conservative government would remove the Goods and Services Tax (GST) from home heating and energy bills—a move he claimed would save the average Canadian household $107 per year. Unfortunately, this proposal betrays a lack of understanding of the most basic principles of good policy. First, it is regressive, as it favours middle and upper income Canadians who spend the most on home heating and energy. Second, like most universal benefits, it wastes money because it fails to target those most in need. Third, it distorts consumers’ decisions because it makes the price of home heating look lower than it actually is, relative to other goods. As a result, consumers will purchase more of it than they would otherwise. Finally, by making fossil energy less expensive, it will lead to increases in GHG emissions instead of reducing them. The professor’s advice to both parties: do your homework before rushing to the microphones to announce new policies. Leslie Shiell is assistant professor of economics at the University of Ottawa. The Hill Times

Zero-emission vehicle subsidies and home heating tax exemptions: both fail the test

Do your homework before rushing to the microphones to announce new policies, writes Leslie Shiell.

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Zero-emission vehicle subsidies and home heating tax exemptions: both fail the test

Do your homework before rushing to the microphones to announce new policies, writes Leslie Shiell.

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