One of the less publicised stories of recent days was last
week’s decision by the UK Department for Transport (DfT) to cut the subsidies
granted to buyers of electric vehicles (EVs). From 9 November, the grants for
new plug-in hybrids will be scrapped, while discounts on all-electric cars will
be cut from £4,500 to £3,500. Coming in the same week as the IPCC issued a
report suggesting that we have until 2030 to limit the rise in global
temperatures to 1.5oC, beyond which irreparable damage will be done
to the global environment, the timing of the decision looks truly abysmal – not
to mention amateurish. It certainly does not make good economic sense.
According to the DfT, the grant for plug-in vehicles was designed to help establish a market for them and having succeeded in this aim it is time to focus support on zero-emission models such as pure electric and hydrogen fuel cell cars. I would suggest that this is wrong – and industry specialists were horrified by the decision. The market is far from established in the UK (and indeed in most other European countries bar Norway): Sales of plug-in hybrid vehicles accounted for just 1.2% of total sales last year – not exactly an established market. According to Mike Hawes, chief executive of the SMMT motor manufacturers body, “prematurely removing up-front purchase grants can have a devastating impact on demand.”
All the evidence suggests that carbon emissions measured over the full lifecycle of EVs are far lower than for vehicles powered by fossil fuels. This report by the International Council on Clean Transportation calculates that even after we factor in the costs of emissions generated during the production of the vehicle battery, which are pretty high, “a typical electric car today produces just half of the greenhouse gas emissions of an average European passenger car.”
It thus makes sense from an environmental perspective to encourage the switch to electric vehicles of one kind or another. But one of the biggest deterrents to buyers is that the purchase price of electric vehicles is higher than their conventional counterparts. However, the running costs of an EV are generally lower, so consumers have to figure out how many miles (or km) they must drive in order that the lower operating costs offset the higher purchase price. In order to do this, I calculated the costs of running a Ford Focus in the US using a petrol-driven version and the electric equivalent. It currently costs around USD10 to travel 100 miles in a 30 MPG Ford Focus (assuming petrol prices at USD3 per gallon) but with US electricity costs currently averaging around 12 cents per kWh, it costs just USD3.72 to cover 100 miles in a Ford Focus Electric. Given these inputs, we can calculate the breakeven mileage based upon a range of prices for the conventional car and the markup for the electric vehicle.
According to my calculations, if the petrol vehicle costs USD15k and the EV is sold at a 10% premium, the breakeven mileage is around 24,000 (38,000 km) which is just less than two years of driving by the average US motorist (13,474 per year). But if the EV premium rises to 20%, the breakeven mileage increases to almost 48,000 (3.5 years of driving). As the EV premium rises, so does the breakeven mileage. Similarly if the conventional vehicle is more expensive in the first place this also drives up the breakeven point. We can plot the various breakeven points in chart 1.
According to the DfT, the grant for plug-in vehicles was designed to help establish a market for them and having succeeded in this aim it is time to focus support on zero-emission models such as pure electric and hydrogen fuel cell cars. I would suggest that this is wrong – and industry specialists were horrified by the decision. The market is far from established in the UK (and indeed in most other European countries bar Norway): Sales of plug-in hybrid vehicles accounted for just 1.2% of total sales last year – not exactly an established market. According to Mike Hawes, chief executive of the SMMT motor manufacturers body, “prematurely removing up-front purchase grants can have a devastating impact on demand.”
All the evidence suggests that carbon emissions measured over the full lifecycle of EVs are far lower than for vehicles powered by fossil fuels. This report by the International Council on Clean Transportation calculates that even after we factor in the costs of emissions generated during the production of the vehicle battery, which are pretty high, “a typical electric car today produces just half of the greenhouse gas emissions of an average European passenger car.”
It thus makes sense from an environmental perspective to encourage the switch to electric vehicles of one kind or another. But one of the biggest deterrents to buyers is that the purchase price of electric vehicles is higher than their conventional counterparts. However, the running costs of an EV are generally lower, so consumers have to figure out how many miles (or km) they must drive in order that the lower operating costs offset the higher purchase price. In order to do this, I calculated the costs of running a Ford Focus in the US using a petrol-driven version and the electric equivalent. It currently costs around USD10 to travel 100 miles in a 30 MPG Ford Focus (assuming petrol prices at USD3 per gallon) but with US electricity costs currently averaging around 12 cents per kWh, it costs just USD3.72 to cover 100 miles in a Ford Focus Electric. Given these inputs, we can calculate the breakeven mileage based upon a range of prices for the conventional car and the markup for the electric vehicle.
According to my calculations, if the petrol vehicle costs USD15k and the EV is sold at a 10% premium, the breakeven mileage is around 24,000 (38,000 km) which is just less than two years of driving by the average US motorist (13,474 per year). But if the EV premium rises to 20%, the breakeven mileage increases to almost 48,000 (3.5 years of driving). As the EV premium rises, so does the breakeven mileage. Similarly if the conventional vehicle is more expensive in the first place this also drives up the breakeven point. We can plot the various breakeven points in chart 1.
Obviously these are only illustrative examples – they are based on US figures and will differ according to local petrol prices and electricity costs. Nor do they include factors such as repair and other maintenance costs. But the point is made: Subsidies do significantly enhance the attractiveness of EVs over the fossil fuel equivalent and it strikes me as a remarkably short-sighted policy to begin phasing out the subsidies already, particularly when battery-powered hybrids still account for such a small market share. Over time, we would hope that the costs of EVs will decline relative to their fossil fuel equivalent, which will make them more economically attractive. But the DfT appears to be relying on the moral argument for buying EVs, rather than the economics. Of course, it would not be the first time that the UK government has launched a policy that flies in the face of the economic evidence. I think there is one that begins with a “B” …
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