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HomeEconomyPicking Winners Before the Green Flag is Waved

Picking Winners Before the Green Flag is Waved

Within mainstream economics, there is an adage that if you subsidize a thing, you get more of that thing. This notion has been used by politicians to justify the government promotion of new technologies that promise to solve major social, economic, and environmental problems. 

The logic for subsidizing new technology rests upon the idea that the private sector has little or no incentive to invest in the research and development of new, socially useful products. Innovation can be risky, and few entrepreneurs want to gamble on ideas associated with high uncertainty unless they know they can finish strong when the checkered flag is waved and recoup potential losses. Enter subsidies, which cushion the potential downside of technological risk, making it more likely investment will flow to whatever is subsidized.

Government resources, however, are not limitless (no matter how much Congress raises the debt ceiling). Trade-offs exist and require tough decisions about what to fund. Politicians and bureaucrats need to choose what appears to be the winning technology ahead of time and reward often-existing businesses that are best situated to make beneficial innovations a reality. 

But are public subsidies always a winning strategy? Or might the drive to promote certain technologies actually forestall or kill incentives to create new innovations that are more promising? Is it possible that by placing bets on who will win the race early on, government officials actually end up fixing the race so the best car doesn’t always win?

Driving Emissions Down

Consider electric vehicles. 

Regardless of where one stands on the state of climate science, most people tend to agree that fuel-efficient cars that produce less emissions are preferable to cars that pollute more and have a low MPG rating, ceteris paribus. The ceteris paribus (“all things equal”) clause here is important, because we must acknowledge that people also prefer cheap energy, powerful vehicles, and a quick refueling process. Transportation currently produces 29 percent of all CO2 emissions, not to mention SO2, NOx, and other particulates. Ergo, cars and trucks are the ideal target for reducing greenhouse gasses.

To that end, electric vehicles (EVs) have become all the rage given that they are zero emission, at least at the “tailpipe” end of the car. (EVs don’t have tailpipes since they don’t have emissions; we know that, but just roll with us.) For any environmental crusader – be they elected official or an EPA functionary – this is a dream come true and EVs cannot come off the production line fast enough. And if lowering end-user emissions is your primary (perhaps only) goal, you would not hesitate getting these cars on the road. Subsidize EVs!

And subsidized they are! As part of the Inflation Reduction Act of 2022, all EVs and plug-in hybrids with a final assembly in North America are granted an EV tax credit. That ostensibly lowers the cost to consumers, although producers capture a significant chunk of the subsidy. Either way, producers, particularly those in North America, are attracted to invest in this specific,  subsidy-winning technology.

Unfortunately for the partisans of EVs, these tax credits may not be towing their full weight. A recent NBER study estimates that the tax subsidy for EVs is responsible for only about 30 percent of the CO2 emissions reduction from the current EV fleet in the US. The political calculation behind tax breaks assumed that nearly everyone would buy e-cars the next time they purchased an auto. Consumers, however, don’t behave the way politicians want them to. The typical EV buyer is, on average, more environmentally conscious than the overall car-buying population, and thus are more likely to buy an EV even without the subsidy. The result is that the emissions reduction targeted by the tax subsidy program is about 27 percent smaller than anticipated. 

But not to worry. If you can’t subsize people into loving EVs, the next logical step is to eliminate any alternatives. And an outright prohibition on competitors is essentially a giant subsidy to the producer of the good not banned. 

Several US states have grown impatient with gently nudging intransigent consumers and producers towards EVs. Instead, they want to pick the winners at the expense of all other options by giving the black disqualification flag to internal combustion engine (ICE) vehicles – i.e., gas guzzlers. Seventeen states, including California, Massachusetts, New Jersey, and Pennsylvania plan to outlaw the sale of new ICE vehicles by 2035. In addition to joining the 2035 ICE ban of consumer vehicles, New York also plans to eliminate all emissions from heavy duty trucks by 2045. Given the huge consumer markets represented by these states, these localized ICE bans essentially become national as manufacturers are less likely to produce gas-powered cars for a shrinking minority of drivers elsewhere. 

Many countries have even earlier deadlines for outlawing ICE-only vehicles, including Demark (2030), Iceland (2030), Ireland (2030), Netherland (2030), Sweden (2030), and the UK (2030).  

Really Zero Emissions?

Ban ICE cars and use subsidies to incentive EVs to eliminate the carbon footprint of vehicles – mission accomplished, right? Not so fast, Speed Racer. Even Mr. Bean (Rowan Atkinson), an initial EV enthusiast and a trained electrical engineer, is having doubts

Alas, the focus on tailpipe-only emissions should raise the yellow flag for those interested in seeking a portfolio of possible avenues for overall emission reductions. Most of the energy produced to charge EVs comes from fossil fuels and thus EVs do not necessarily eliminate emissions; the fumes just emanate from somewhere else. Remember, the planet doesn’t care where the emissions come from. Depending on the energy source (coal versus hydroelectric), running an EV may or may not result in significantly less emissions than ICE vehicles operating on traditional fuels.

Furthermore, tailpipe emissions are only part of the emissions generated by vehicles. Their construction and assembly also produce emissions. According to Volvo, the manufacturing and assembly of EVs produce 70 percent more emissions than typical ICE vehicles. Thus, it takes roughly nine years of driving before an EV produces less emissions than a comparable gas engine.

Finally, it is important to consider that a rapid move to EVs in the near future will require the production of a vast array of charging stations both in residential and commercial settings, not to mention a significant scaling up of our aging electrical grid. All that added manufacturing of infrastructure is bound to come with substantial carbon emissions. 

Keeping Innovative Competitors In the Pits

Even if we granted that electric cars produce less emissions than the typical gas-fueled auto, there is another less visible, but potentially greater problem created by EV subsidies and ICE bans – the sidelining of superior technology that may be more efficient and accessible to consumers. Entrepreneurs are essentially being held “in the pits” and not being allowed to compete.

Consider that there is some exciting research and development being done in the area of alternative fuels by private companies. For example, the Indy car racing league is using a second-generation fuel that is composed of 100 percent sugarcane waste and other biofuels. The producer, Shell, claims that the fuel is both 100 percent renewable and uses the non-edible portion of the plant, thus eliminating the need to choose between using crops for fuel or food (unlike the tension over corn being diverted into ethanol, another wasteful subsidy program). Moreover, its complementary in that the more food stock that is produced, the more raw resources we have for fuel. According to the Indy car series, this switch reduced carbon emissions by 60 percent. 

Other auto racing organizations, such as the Formula 1 series, are also moving into alternative fuels. Likewise, Porsche is developing a low-carbon emission fuel for its racing fleet that can be easily adopted by current ICE vehicles. You can keep your 2012 Ford F-150 for another twenty years with proper maintenance. And we haven’t even mentioned the potential of hydrogen cell technology, which is still not ready for market but offers all the benefits of these other alternative fuels with a plentiful supply of base fuel sources

All of this means we can keep producing the same cars we are making currently and use the same filling stations that now exist without having to install a vast array of EV charging stations! Your local gas station can easily (and gradually) convert to an alternative fuels without significant changes to infrastructure. 

There is one additional benefit of the new eco-fuels on the horizon: They are as easy to refuel as a contemporary gas vehicle. Race car drivers not only want to be fast on the track, they don’t want to waste time refueling in the pits. At present EVs take a considerable amount of time to recharge, and time is a valuable resource often ignored in policies promoting electric cars.

While all these technologies are promising, their practical use is still off in the future and their supporters are running out of time. If subsidies encourage enough people to jump into the EV market or if alt-fuels cannot be made practical by the time ICE cars are banned from sale, the race will be over. These promising technologies sadly will become minor footnotes in the history of technology. And we may all be the worse for it if we cannot build the electrical infrastructure to keep up with EV charging demands and must deal with rolling blackouts or calls to reduce other uses of electricity such as air conditioning or washing machines.

If one thinks that subsidies and mandates could kill a more beneficial innovation is silly fear mongering, one need only consider the case of Honda. During the 1960s and 1970s Honda developed an engine that reduced emissions without the need for a catalytic converter. The Japanese company accomplished this by using two separate intake valves, one for a rich mixture and one for a lean. Unfortunately for Honda, GM had a patent on the catalytic converter, and more importantly, lobbied to require all vehicles to be sold with catalytic converters beginning in 1975. By requiring catalytic converters, politicians could show they had done something to clean the air in the short-run. Alas, it also punished Honda (and consumers) for designing a cleaner burning engine. The irony is that even with the lower emissions engine, Honda was required to install GM patented catalytic converters, which require the environmental-destructive mining of rare earth metals! 

The Problem is Political, Not Technological

Let’s be honest. We all want a cleaner environment and access to reliable and sustainable energy that makes our lives more comfortable. Promising such a world is very enticing to politicians who live to win the next election. Alas, elections come fast and furious in our democratic landscape, incentivizing politicians to steer public policy in directions that give themselves short-term payoffs. Elected officials must show they have “done something” before the next election rolls around. They view technological solutions as a short sprint when in reality the most important races are long-distance rallies with competitors who frequently change positions. If long-term environmental sustainability is the real goal of policy, it is proper to let the best cars (innovation) win.

Today’s technological leaders may be tomorrow’s laggards as new entrepreneurs find more efficient means of competing and offering better products. Having officials pre-select competitors before the green flag is shown to the field handicaps those who may yet discover their full potential, and it makes the competition less exciting for those of us in the stands. Moreover, the checkered flag should never be waived before everyone has had the opportunity to compete. Indeed, it may be best to take all the flags: green, yellow, red, black, white and checkered, away from the politicians so that they can no longer penalize or disqualify potential competitors for their “actions detrimental to racing” and habitually place their bet on their pre-selected winner.

To paraphrase Rober Earl Keen, the road goes on forever, and the innovation never ends … if we let it.