Congressional Budget Office and Media Miss the Point on Electric Vehicle Incentives

October 25, 2012 | 2:01 pm
Jim Kliesch
Former contributor

A recent Congressional Budget Office (CBO) report critical of electric vehicle incentives raises some interesting points about technology development, but fundamentally misses the mark on the role that advanced technology incentives play.

The report, issued last month, garnered a fair amount of media coverage from its assertion that the amount of federal incentives available to buyers or producers of electric vehicles would come to about $7.5 billion over the next seven years. This amount includes, among other things, tax credits to vehicle purchasers, grants to battery and component manufacturers, grants to establish demonstration and education projects, and direct loans to vehicle manufacturers and suppliers.

Missing the long view

What the CBO — and most of the reporters who covered the analysis — missed, however, is the fact that these incentives are designed to drive long-term benefits, not short-term sales bumps. The role of these incentives is to nurture a market so that technology costs can come down in time, building a successful, self-sustaining industry over the long term.

Many technologies have failed in this so-called “valley of death,” the stage in which not enough capital is available for the technology to reach economies of scale. By helping bridge that gap, incentives will give the technology an opportunity to grow over the long term, helping pave the way for a future where vehicles running on electricity are as common as those running on gasoline.

So let’s be clear: While your neighbor who bought a plug-in vehicle may have done so because of a $7,500 tax credit, making vehicles more affordable today isn’t the end goal. It’s a means to build a self-sustaining industry that can create clean, affordable vehicles — without incentives — tomorrow.

Incentives vs. standards

The CBO does correctly point out that the incentives could have long-term oil and emissions reduction benefits if they drive a market that prompts future regulators to set stronger efficiency or vehicle emissions standards down the line.  They also correctly point out that because of the structure of today’s vehicle standards, a near-term bump in sales resulting from the incentives won’t meaningfully reduce oil consumption or emissions. This is hardly a “gotcha,” though, as the purpose of tax credits isn’t to directly save oil or cut emissions. Those objectives, as the CBO well knows, are covered by vehicle standards.

Poor reporting

As the CBO analysis demonstrates, ignoring key policy objectives allows one to arrive quite quickly at erroneous conclusions. And sadly, this isn’t the first time the CBO missed the mark in assessing vehicle policies.

To be fair though, the media did an equally poor job covering this report. By and large, the story told by the media was a singular tale about squandered money, despite the fact that we’re still in the nascent stages of a budding market. There was little mention of the role that incentives are intended to play; or that building an industry is a marathon and not a sprint; or that investments are made to reap rewards over the long term; or that high-return investments, even when risky, can in fact be a wise decision.

Finally, while $7.5 billion is not chump change, it’s worth putting those funds into perspective. That amount of money, which CBO projects would be spent over seven years, is less than we currently spend on gasoline in this country in a single week. That’s right, a week. From where I stand, spending money to help foster an industry that could, over the long term, make us far less-reliant on oil is an investment well worth making.