Plug-in Vehicle Subsidies: Taxing Peter to Buy Paul's New Car

by: John Petersen

Industrial subsidies have been an important feature of the American economic landscape since the late 19th century for one simple reason – they work. After the steam locomotive proved its ability to quickly and cheaply move people and cargo long distances, the government launched a massive effort to span the country with steel rails and bring the benefits of a rapid, safe and reliable national transportation system to all its citizens. After electric lighting proved its merit, the rush was on to build a national infrastructure and bring the benefits to all.

After the internal combustion engine proved its merit the rush was on to build better roads and highways, increase oil production and make automobiles a luxury all men could afford. After advances in communications and information technology proved their merit, we were off to the races again. In fact, it's hard to name an industry that hasn't been richly rewarded by our long tradition of subsidizing the rapid implementation of proven technologies through the creation of productive assets that make the nation richer.

Over the last decade, however, there's been a subtle erosion of subsidy theory that most observers have failed to notice. In addition to traditional subsidies that create productive assets and make the nation richer, we're seeing a proliferation of consumption subsidies that enrich individuals while providing no meaningful benefit to society. The poster child for this unconscionable rape of the treasury is the $7,500 tax credit for buying a plug-in electric vehicle. The government is quite literally taxing Peter to buy Paul's new car.

The credit will be available for the first 200,000 qualifying vehicles sold by a manufacturer at a direct cost of $1.5 billion per automaker. On the positive side of the ledger, Paul's new plug-in will reduce national oil consumption by about 100 barrels over its useful life at a cost of $75 per barrel. On the negative side, Paul's State, city, utility, employer and favored merchants will have to spend their own money adapting to Paul's increased demand for electricity and Paul's desire for a convenient charging infrastructure. I have to wonder if it wouldn't be cheaper to just give Paul a 10-year free gas coupon.

At this juncture I'm not sure which thought is most apropos, Everett Dirkson's quip, "a billion here, a billion there, and pretty soon you're talking real money;" Ayn Rand's bleak warning that "No private embezzlers or bank robbers in history have ever plundered people's savings on a scale comparable to the plunder perpetrated by the fiscal policies of statist governments;" or the bandit Calvera's self-absorbed arrogance in The Magnificent Seven, "If God didn't want them sheared, he would not have made them sheep!"

In December Vinod Khosla surprised cleantech investors when he called for an end to corn ethanol subsidies, which Al Gore characterized as a mistake motivated by presidential aspirations and the importance of the farm vote. While I agree wholeheartedly with their conclusions about corn ethanol subsidies, I have a very hard time buying into the argument that "subsidies should be a short-term, and not a permanent measure, used for five to seven years after a technology first starts scaling in order to allow it to transition down the cost curve until it can compete on its own merits."

No industrial revolution has ever flowered from a technology that did not first prove its merit to a skeptical, competitive and inertia bound market. Subsidies can accelerate the adoption of cost-effective innovations, but they can't make a silk purse out of a sow's ear. The harsh reality is that a business model that can't survive without subsidies can't thrive with subsidies.

While reasonable men can argue the pros and cons of every subsidy, the historical justification has always boiled down to the fact that subsidies encourage domestic economic activity, create domestic jobs and increase the national wealth. Even the much-maligned corn ethanol subsidies were paired with tariffs on imported ethanol to protect domestic producers. But when it comes to plug-in vehicles, domestic productive capacity and economic activity are irrelevant. The credit doesn't add a single brick to the nation's productive capacity and it doesn't even distinguish between foreign and domestic products. Regardless of where the vehicles are built, the batteries that will account for 25% to 50% of their total cost will be manufactured overseas-- or made in the US using imported equipment, components and supplies.

We've quite literally gone from sending jobs overseas to subsidizing job creation overseas.

In my adult lifetime, every government sponsored energy independence program has failed because the core technologies were not cost-effective. The schemes that were ultimately disastrous for investors include:

28 years ago Methanol
18 years ago Electric vehicles
13 years ago HEVs and Electric vehicles
8 years ago Hydrogen Fuel Cells
5 years ago Ethanol

Does anybody see a pattern besides me? Have investors who are paying ten times book value for Tesla Motors (NASDAQ:TSLA) failed to learn anything from the experience of Ballard Power (NASDAQ:BLDP) and Pacific Ethanol (NASDAQ:PEIX)? What about battery manufacturers like A123 Systems (AONE), Ener1 (NASDAQ:HEV), Altair Nanotechnologies (NASDAQ:ALTI) and Valence Technologies (VLNC) who have no meaningful protection from foreign competition? Does anybody really believe a feel-good program that taxes Peter to buy Paul’s new car will, or for that matter should, survive looming Federal budget battles?

Albert Einstein defined insanity as "doing the same thing over and over again and expecting different results." Once again we've hared off on a tangent and tried to force uneconomic technologies on a skeptical, competitive and inertia bound market. In the process we've made a mockery of more than a century of sound industrial subsidy theory to enrich individuals while making the nation poorer.

Disclosure: No positions