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German Transport Minister Rejects E-Car Subsidy Proposals, Pundits Question Efficacy of Subsidy Regimes.

Transport accounts for around a quarter of total EU emissions [1] and, of this, 91% comes from road transport vehicles [2]. It has been widely accepted that, to mitigate these emissions, this sector needs to shift towards electrification [3]. With new sales of internal combustion engines being effectively banned in the EU from 2035 onwards, countries are looking to transition to e-cars fast. So, in a bid to speed up the progress, German transport minister Volker Wissing reportedly hoped to massively extend subsidies for electric vehicles [4]. Although this multi-billion-euro scheme was eventually rejected, it raised important questions about how the electric vehicle market should be invested.

Wissing’s Plan for the Electric Vehicle Market

In a government report obtained by German business newspaper Handelsblatt, minister Volker Wissing planned to offer subsidies for purely electric or fuel-cell vehicles until 2025 in a 73-billion-euro scheme [5]. In this, buyers of electric cars costing up to €40,000 were documented to receive €10,800 in government support, nearly doubling what is currently being offered [5]. Although Wissing will not follow through with these plans, generally speaking, there are great benefits to subsidising electric vehicles.

Benefits of subsidising EVs

Total number of AF passenger cars and vans (M1+N1)

As a widely recognised alternative to internal combustion engines or plug-in hybrids, electric vehicles produce no exhaust emissions and, comparably, cause less pollution [3]. In fact, in just over a year, a single electric car on the road can save an average of 1.5 million grams of carbon dioxide [5]. That’s the same as four return flights from London to Barcelona [6].

Even though the cost of owning and maintaining an e-car can differ, considering everything, studies confirm that they have a lower total cost of ownership than fossil-fuel-powered vehicles [2]. But these projected financial savings first require an investment, and their initial purchase price drives buyers away [2]. To combat this issue, governments have appealed to subsidies.

As Teodora Serafimova, a research associate at Florence School of Regulation – Transport Area (European University Institute) noted: “EV subsidies and other types of incentives, be these financial or practical (e.g., access to bus lanes, free parking, etc.) can be an important means to close that price gap and create a level playing field for EVs to compete against their conventionally-fuelled counterparts, whose price, in turn, does not reflect the entirety of the external costs (on human health and the environment) that they generate. As is the case for most new technologies, financial incentives play a crucial role in kick starting the market until the technology matures” [3]. 

Criticisms of EV subsidies

While Wissing’s proposal seemed like an idealistic way to help Germany meet the EU’s goal for 2035, environmental organisations met his proposal with stark criticism. Greenpeace especially slammed the idea, calling it a “sinfully expensive gift to the car industry” that does “next to nothing for climate protection” [3]. To explore why Greenpeace thought this, below will address three vital criticisms of subsidies: being expensive, inefficient, and unfair [2].

Although subsidies and incentives may eventually benefit the car manufacturing industry, such schemes come at a financial cost. And, in the case of Wissing’s proposal, this cost would be 73-billion-euros [4].

Minister Wissing's have been criticised by many due to their efficacy and costs.

Critics would argue this is a considerable expense, especially when e-cars are not the sole solution to making the roads pollution-free [2]. Specifically, environmental groups have asserted that even a complete switch to electric vehicles would still not solve traffic congestion issues or air and noise pollution levels in cities [2]. Therefore, to help solve this, further measures will need to be implemented to encourage public, shared, and active mobility [2].

Beyond this, however, studies have sown doubt into how effective switching to e-cars will be at reducing emissions. One study, in particular, concluded that, depending on behavioural characteristics, the transition could increase rather than decrease emissions [5].

Lastly, the criticism that they are unfair stems from how manufacturers typically respond to an announcement of subsidies. Specifically, it leads them to increase the price of their product in line with an expected increase in demand [2].

“If manufacturers raise the price in a range that is equivalent to the amount of the subsidy, this can lead to a situation where they capture the entire value of the subsidy leaving consumers no better off than before the subsidy. The German proposal would have increased subsidies to cover luxury EVs costing up to 60,000 euros. In such cases, academic literature has found that manufacturers tend to capture most of the subsidy, whereas their buyers, mostly belonging to the higher income segment of the population, tend to capture little of them,” Serafimova said [2].

What next?

In terms of electric vehicle subsidies, studies have recommended that targeting incentives by income, vehicle disposal, geography and/or vehicle miles travelled improves their cost effectiveness more than twofold [7]. Uniform subsidies have their downfalls, and so to ensure that the money spent decarbonising the transportation sector is efficient, and as inexpensive as possible, individuals like Wissing need to consider targeted subsidies as an option [7].

So, if done right, electric vehicle subsidies could be an immensely beneficial way to steer the sector towards a sustainable future. Even though Wissing’s subsidy plans may have, at first, appeared like a vital step in the right direction, large uniform subsidies are not the best way to go. Instead, incentives need to be targeted by income, vehicle disposal, geography, and vehicle miles travelled. And alongside this, these subsidies need to be paired with additional measures to ensure pollution levels on the road are effectively reduced.

References

[1] European Commission , “Transport emissions,” [Online]. Available: https://ec.europa.eu/clima/eu-action/transport-emissions_en. [Accessed 6 June 2022].
[2] Gov.uk, “Transport and environment statistics: Autumn 2021,” Department for Transport, 19 October 2021. [Online]. Available: https://www.gov.uk/government/statistics/transport-and-environment-statistics-autumn-2021/transport-and-environment-statistics-autumn-2021#:~:text=Transport%20produced%2027%25%20of%20the,transport%20vehicles%20(111%20MtCO2e).. [Accessed 30 May 2022].
[3] T. Serafimova, Interviewee, Research Associate. [Interview]. 23 May 2022.
[4] EurActiv, “German transport minister Wissing plans massive increase of e-car subsidies,” 9 May 2022. [Online]. Available: https://www.euractiv.com/section/transport/news/german-transport-minister-wissing-plans-massive-increase-of-e-car-subsidies/. [Accessed 30 May 2022].
[5] The Local, “German Transport Minister wants to ‘significantly raise e-car subsidy’,” 9 May 2022. [Online]. Available: https://www.thelocal.com/20220509/german-transport-minister-wants-to-significantly-raise-e-car-subsidy/. [Accessed 30 May 2022].
[6] EDF, “Benefits of electric cars on the environment,” [Online]. Available: https://www.edfenergy.com/for-home/energywise/electric-cars-and-environment#:~:text=The%20major%20benefit%20of%20electric,This%20reduces%20air%20pollution%20considerably.. [Accessed 2022 May 31].
[7] T. L. Sheldon and R. Dua, “Measuring the cost-effectiveness of electric vehicle subsidies,” Energy Economics, vol. 84, pp. 1-11, 2019.
[8] A. Nunes, L. Woodley and P. Rossetti, “Re-thinking procurement incentives for electric vehicles to achieve net-zero emissions,” Nature Sustainability, pp. 1-6, 2022.

Images:

  1. Jakob Härter, Zoe charging Bettermann Ladebox B3200, CC BY-SA 2.0 
  2. European Alternative Fuels Observatory 

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