Larry Kudlow, one of President Donald Trump’s top economic advisers, recently said that the administration would end subsidies for electric cars and other renewable-energy technologies. Under the existing program, buyers of electric vehicles get a federal tax credit of $2,500 to $7,500.
It’s unlikely that Trump can eliminate the program without an act of Congress, which seems unlikely given that the Democrats have retaken the House of Representatives. But the rhetoric is still important. It’s part of Republicans’ consistent pattern of attacking alternative-energy technologies and protecting traditional energy industries. Battery-powered cars are an alternative to oil-powered ones, and the petroleum industry has long been a pillar of Republican support. More generally, hostility to alternative energy is part of what Alex Trembath of the Breakthrough Institute calls “technology tribalism” — a way for Trump to signal to his base that he isn’t on board with the hippies and their climate-change activism. After all, Trump has worked hard to increase subsidies for coal power.
For any number of reasons, cutting these subsidies is almost certainly a bad idea.
Standard economic theory says that subsidies distort market prices. Libertarians have long used this as a reason to oppose green-energy subsidies. A recent editorial in Investor’s Business Daily called the tax incentives “soft socialism.”
But standard economic theory also says that distorting market prices can sometimes make the economy more efficient. One such case — called an externality — is pollution. When a coal-fired power plant belches carbon dioxide into the air, the damage that does to the global climate isn’t reflected in the price of the electricity the plant sells.
In the case of climate change, this cost is probably very large. The Trump administration’s own recent National Climate Assessment predicts that unless global warming is severely curbed, the damage to the U.S. in the coming decades will be enormous. The U.S. economy, the report predicts, could be 10 percent smaller by the end of the century because of more intense wildfires, rising sea levels and other climate-related phenomena. A report by the Intergovernmental Panel on Climate Change is even more apocalyptic.
The standard policy that economists recommend to counteract climate change is a carbon tax. It’s a textbook solution — simply add the harm that carbon does to the price that people pay to emit it, and perfect efficiency is restored.
But although carbon taxes are a good policy, they have a major political drawback — tax policy is set at the country level, while climate change is global. No nation wants to bear more than its fair share of the carbon-tax burden, but every country has an incentive to burn cheap coal and oil and leave the clean-up to other countries. One example of how this can play out is France, which is one of the more responsible countries on climate issues; citizens there have recently rioted over higher fuel taxes.
The global nature of climate change also limits the amount that the U.S., on its own, can do to halt the phenomenon. U.S. emissions are already falling, but that drop has been dwarfed by the rise in emissions in China:
So U.S. carbon taxes, while a good thing to do, can never constitute a solution to global warming. Instead, the U.S. needs to harness a positive externality — technology — to counter the negative carbon externality.
Technological ideas spread from country to country and from company to company. Since companies won’t be able to capture most of the value their innovations create, they will never do enough investment in research and development on their own. The government spends money on research in order to help make up the difference. But subsidies for specific technologies can also be a way of encouraging advancements in those areas.
Take solar power. Four decades ago, conservatives ridiculed the technology as un-economical. But then the price of solar modules plunged by 99 percent. And it’s expected to keep dropping:
Most of that decline didn’t come from breakthroughs in the basic technology. Instead, it came from companies figuring out many small, incremental innovations in production and deployment of solar panels. Subsidies for solar power helped generate demand for the technology before it was economical on its own merits, and prompting companies to expand production. That, in turn, pushed them along the technological learning curve, and the resulting innovations spread throughout the world.
Solar, however, doesn’t solve the whole energy problem on its own — to fully replace coal, natural gas, and oil, we need energy storage. Better batteries are needed, both for cars and to store solar power for when the sun isn’t shining.
This is where electric car subsidies come in. Battery technology, like solar power, looks like it has a learning curve. Subsidizing electric cars encourages companies to make more batteries, which helps them discover many small ways to make batteries better and cheaper. Those innovations will then be copied by China, helping them to cut their own gargantuan carbon emissions much faster.
Thus, if Trump actually did manage to cut electric-car subsidies, it would be very bad for the global climate and for the economic future of the U.S. The money the government saved would be modest — perhaps a few tens of billions of dollars — while the potential harm to progress in battery technology could have major global consequences. With such huge dangers looming for the global climate, keeping — and expanding — electric vehicle subsidies is the safest bet.