Electric vehicles enjoy unflinching support of individuals, environmentalists, social groups and authorities for the sheer reason that they are thought to be more environment-friendly than their gas-powered counterparts.
Governments, in particular, have offered attractive and generous subsidies and tax credits on electric vehicles in an attempt to make EVs the affordable eco-friendly alternatives to internal combustion engine (ICE) vehicles. Check out what’s there in Budget 2019 for Electric Vehicles.
These subsidies on electric vehicles have had many direct and indirect effects on purchasing behavior, the market, and the economy. Let us explore some effects of subsidies on electric vehicles.
Governments often make dedicated policies to allow enough tax credits and subsidies on electric vehicles. Since the governing bodies themselves are offering attractive financial benefits on the vehicles, the policies are generally widely publicized.
Consequently, more people are aware of tax benefits and are therefore aware of the variety of electric vehicles in the market.
Greater awareness often translates to enhanced sales. Thus, subsidies on electric vehicles indirectly create a larger demand.
Greater Market Penetration
Electric vehicles are often priced at premium rates. This has always been a major criticism against EVs.
The higher prices render the electric vehicles unaffordable for the common man and the elite groups are hardly ever attracted to electric models.
Hence, these vehicles are heavily subsidized by governments in most of the counties. This is done with a view to counter the effects of high production costs which are ultimately absorbed in the market price.
With subsidies and tax credits, electric vehicles are not only affordable but they also prove to be highly economic for the middle class. Thus, subsidies enable greater market penetration for electric vehicle manufacturers.
Mass public inconvenience
Surprisingly, not all the effects of subsidies on EVs are positive. Deep discounts on the purchase of electric vehicles have brought about several unpleasant results in different parts of the world.
More subsidies result in a dramatic increase in the number of vehicles on the streets. This leads to severe congestion and traffic jams.
In Norway, several financial benefits were withdrawn when 75% of the vehicles on bus lanes were electric cars which caused the local buses to be chronically behind the scheduled timings.
The increased number of vehicles had caused severe inconvenience to a bigger chunk of the population who used public transport.
Loss of tax revenues
Another important economic effect of subsidies is the loss of tax revenue to the government. Allowing tax credits on electric vehicles creates a two-fold problem in terms of revenue generation.
An attractive subsidy means more and more people will shift from the conventional ICE vehicles to electric vehicles in the near future.
This results in lesser consumption of petroleum products. Considering that many of the government’s ambitious projects are carried out with tax revenue generated from petroleum products, losing out on that source might prove to be a problem.
Assuming that the government continues to subsidize electric vehicles, the expenditure keeps increasing while not fetching any revenue. Hence, subsidies on EVs can substantially reduce the revenue for the government.
Loss in social welfare
China, with its huge population, is the largest market for electric vehicles. The policymakers in China have consistently supported the advent of electric vehicles with attractive subsidies.
A research study conducted by J.Qian explores the effects of the subsidy program in 2015. According to the study, the subsidies have had an impressive effect on enhancing the sales of EVs.
The subsidy program contributed to 94% of the sales in large cities. However, the program was aimed at low-quality EV models that were not well received by the consumers.
The estimation also suggests that the heavy investment in the subsidies took away a large part of the budget from social welfare. It was estimated that the subsidies caused a total loss of $2.88 billion in social welfare.
Governments in a desperate attempt to reduce the consumption of petroleum products have resorted to subsidies on electric vehicles.
It must be noticed that similar treatment was given to diesel-powered vehicles when diesel engines were first introduced as a greener alternative to petrol engines.
It was later understood that diesel engines are far from being eco-friendly. More extensive research may be necessary to make electric vehicles affordable without subsidies.