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Automotive

The government’s zero-emission vehicles mandate is an arrogant, unnecessary gamble

Published

4 months ago

8 minute read

From the MacDonald Laurier Institute

By Jerome Gessaroli

This poor policy will disproportionately hurt middle- and working-class Canadians.

In December 2023, Steven Guilbeault, the federal minister of environment and climate change, announced that all new auto sales in Canada must be zero-emission vehicles by 2035. The Liberal government’s mandate to restructure the auto sector is industrial policy on a massive scale. Whether one agrees or disagrees with the mandate, there is general consensus on the substantial nature of this government intervention.

Many people write about whether wholesale government mandates will benefit or harm Canadians. Pundits of all stripes invoke their favoured political and economic ideologies (whether it is capitalism, command socialism, dirigisme, or economic nationalism) when discussing the government’s actions. When evaluating the efficacy of these government mandates, I will refrain from using polarizing labels and instead apply a first principles approach to assess how successful products, markets and entire industries are created.

To illustrate this approach, I reference a classic essay written in 1958 by Leonard E. Read, “I, Pencil.” In this essay, Read questions whether anyone truly knows how to produce a pencil from scratch, a simple commodity that has been mass-produced for over 300 years.

Read describes a pencil’s components, including wood, lacquer, graphite, a bit of metal, an eraser, and labelling. He delves into the intricacies of each element needed for pencil production. For instance, harvesting wood involves using saws, trucks, railcars, radios, and other equipment. The extensive skills, knowledge, and capital needed to design and manufacture this equipment are immense. Motors, railcars, trucks, and radios all require mining and refining ores, engineering design, manufacturing, distribution, and deployment, just so loggers can do their job.

After the wood arrives at the sawmill, it is cut, machined, and dried. The equipment and expertise needed for this second step are too long to list. Power for the mill and kiln, generated by a hydroelectric dam and transmitted through power lines, requires its own design, construction, and operation—a testament to human ingenuity.

The pencil’s graphite must be mined and imported. Transforming raw graphite into the final pencil material involves mixing it with various compounds at the mine site, moulding, cutting, multiple drying rounds, and quality checks. The graphite then travels to the pencil plant, where it undergoes further mixing, moulding, and cutting and is then placed inside the pencil. Chemists, manufacturing engineers, production workers, millwrights, and truck drivers, not to mention the specialized equipment for graphite manufacturing, all play crucial roles in this intricate process.

The pencil lacquer, made up of various compounds, is applied to the wood, and then the pencil runs through a specialized machine multiple times to get the desired finish. Inputs, including the chemical process, labour, and co-ordination for this procedure are too lengthy to detail. The aluminium band around the pencil serves to secure the eraser.

The eraser must be abrasive enough to remove the graphite from the paper without damaging the paper itself. Over time, chemists have changed the eraser’s composition, using their knowledge of polymers and other chemicals. The intricate production of a simple pencil requires diverse material inputs from various sectors and production processes, all of which must be cost-efficient to keep the pencil’s cost very low.

The collective knowledge, capital, and materials needed to produce a pencil are dispersed among millions of individuals and companies throughout society. No single person, even the CEO of a pencil company, possesses anything but a tiny fraction of the knowledge needed to make a pencil.

Despite this diffusion, spontaneous order emerges, driven by individuals pursuing their own interests, needs, and wants. As Read argues, those involved in the pencil’s production from miners, loggers, and engineers to CEOs, perform their tasks not because they desire a pencil but for other motivations. Instead, each participant exchanges their specific ability for the goods and services they need, with the pencil potentially being one of many items in this exchange.

Creating a zero-emission vehicle sector is vastly more complicated than a pencil. Given this complexity, the feasibility of any single entity, including the government, to successfully direct an auto sector restructuring is doubtful. Sustainably producing zero-emission vehicles instead will require decisions, capital, and resources dispersed throughout society that spontaneously arrange themselves in a manner that responds to the demand for such vehicles.

The federal government has assured Canadians that they will help with this transition, primarily through government subsidies to consumers and businesses. Money is given to subsidize zero-emission vehicle purchases to make them a bit less costly.

A total of $43 billion will be provided by the federal, Ontario and Quebec governments in subsidies for three battery plants, enabling the companies to manufacture batteries profitability. As well, funding is provided for 42,000 electric chargers, which are in addition to the 40 percent of existing chargers that the government has already subsidized to help keep drivers’ vehicles on the road.

The federal government cannot be certain its decisions are correct. It might be better to not subsidize battery plants and instead relax restrictions on supply chain development. This would involve ensuring the supply of critical minerals, chemicals, electrode production, transportation services, testing equipment, recycling, and more.

The government’s approach bypasses the price system and diverts money from its best use. The subsidies are artificial. While companies may initially react to these subsidies, their response is contingent upon the government’s continued support.

Without the millions of people making individual decisions that are spontaneously organized through the price system to create a sustainable zero-emission car market, the federal government’s mandate will likely fail.

It is the height of hubris to assume that the government can restructure the auto industry in such a fundamental way. More likely, the massive subsidies will financially burden Canadians for many years, leading to a disarray of misallocated resources that will take years to correct. Indeed, the Parliamentary Budget Office estimates that the debt charges for the federal and participating provincial governments subsidizing battery manufacturing will increase the total cost by $6.6 billion over 10 years.

This poor policy will disproportionately hurt middle- and working-class Canadians, through lower employment and higher taxes that would otherwise be unnecessary.

Jerome Gessaroli is a senior fellow at the Macdonald-Laurier Institute and leads The Sound Economic Policy Project at the British Columbia Institute of Technology.

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Biden’s Climate Agenda Is Running Headfirst Into A Wall Of His Own Making

Published on May 17, 2024

By

From the Daily Caller News Foundation

By WILL KESSLER

 

President Joe Biden’s administration unveiled tariffs this week aimed at boosting domestic production of green energy technology, but the move could end up hamstringing his larger climate goals.

The tariffs announced on Tuesday quadruple levies for Chinese electric vehicles (EVs) to 100% and raise rates for certain Chinese green energy and EV components like minerals and batteries. Biden has made the transition to green energy and EVs a key part of his climate agenda, but hiking tariffs on those products to help U.S. manufacturing could jack up prices on the already costly products, slowing adoption by struggling Americans, according to experts who spoke to the DCNF.

The risks posed by hiking levies on green technology expose the inherent tension between Biden’s climate agenda and his efforts to protect American industry, which often struggles to compete with cheap foreign labor. Items on his climate agenda typically raise costs, and requiring companies to comply could make them uncompetitive on the world stage.

“These tariffs are a classic example of the Biden administration’s left hand not knowing what the right hand is doing,” E.J. Antoni, a research fellow at the Heritage Foundation’s Grover M. Hermann Center for the Federal Budget, told the DCNF. “The inability to import Chinese-made EVs due to prohibitively high costs will necessitate importing raw materials and parts for EVs from China. Since automakers can’t afford to build and assemble the vehicles here, prices will have to rise. In other words, American consumers will pay the cost of this tariff, not the Chinese.”

The White House, in its fact sheet, pointed to China artificially lowering its prices and dumping goods on the global market as the justification for the new tariffs in an effort to help protect American businesses. China has pumped huge subsidies into its own EV industry and supply lines over the past few years, spawning a European Union investigation into vehicles from the country.

“Tariffs on Chinese EVs won’t just make Chinese EVs more expensive, they will also make American EVs more expensive,” Ryan Young, senior economist at the Competitive Enterprise Institute, told the DCNF. “This is because domestic producers can now raise their prices without fear of being undercut by competitors. Good for them but bad for consumers — and for the Biden administration’s policy goal of increased EV adoption.”

Several American manufacturers are already struggling to sell EVs at a profit, with Ford losing $4.7 billion on its electric line in 2023 while selling over 72,000 of the vehicles. To ease price concerns and increase EV adoption, the Biden administration created an EV tax credit of $7,500 per vehicle, depending on where its parts are made.

The market share of EVs out of all vehicles fell in the first quarter of 2024 from 7.6% to 7.1% as consumers opted to buy cheaper traditional vehicles instead. Growth in EV sales increased by just 2.7% in the quarter, far slower than the 47% growth that the industry saw in all of 2023.

The Biden administration has also sought to use regulations to push automakers toward electrifying their offerings as consumers refuse to voluntarily adopt EVs, finalizing rules in March that effectively require around 67% of all light-duty vehicles sold after 2032 to be electric or hybrids.

“By raising the price — and thereby stunting the deployment — of EVs, the tariffs undermine the Biden administration’s stated goals of reducing carbon emissions (as many U.S. environmentalists and EV fans have recently lamented),” Clark Packard, research fellow in the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute, wrote following the announcement. “The EV tariffs (and also-​announced solar tariffs) would continue the administration’s habit of choosing politics and protectionism over their environmental agenda.”

Despite the subsidies, the 25% tariff that is currently in place for Chinese EVs already prices the product out of the U.S. market, resulting in no Chinese-branded EVs being sold in the country, according to Barron’s. Only a handful of the more than 100 EV models being sold in China appeal to American consumers, and none of them can compete under current levies.

“Something like this happened just a few years ago when former president Donald Trump enacted 25% steel tariffs in 2018,” Young told the DCNF. “Domestic steel producers raised their prices by almost exactly the amount of the tariff, and America soon had the world’s highest steel prices. As a result, car prices went up by about $200 to $300 on average. Larger trucks with more steel content increased even more. Now Biden is going to do the same thing to EVs.”

In the year following the increase in steel tariffs under the Trump administration, U.S. Steel’s operating profit rose 38%, prices were hiked 5 to 10% and revenue was up 15% due to reduced competition, according to CNN.

Despite the massive tariff hike on EVs, Biden only raised the tariff rate on Chinese lithium-ion EV batteries and battery parts to 25%, according to the White House. The tariff rate on certain essential minerals, like natural graphite, was also hiked to just 25%.

“Despite rapid and recent progress in U.S. onshoring, China currently controls over 80% of certain segments of the EV battery supply chain, particularly upstream nodes such as critical minerals mining, processing, and refining,” the White House wrote in its fact sheet. “Concentration of critical minerals mining and refining capacity in China leaves our supply chains vulnerable and our national security and clean energy goals at risk.”

China has broad control over the majority of minerals necessary to construct EVs, possessing nearly 90% of the world’s mineral refining capacity. Sources of the required minerals often also have serious human rights concerns, such as the world’s supply of cobalt, which has widespread ties to child labor.

Biden attacked former President Donald Trump during the 2020 election for the broad tariffs that he put on Chinese goods, noting that “any freshman econ student” could point out that the costs of the tariffs would be passed on to American consumers.

EV makers have increasingly struggled over the past year to maintain profits amid stalling demand, with the largest American EV manufacturer, Tesla, reporting a 10% drop in year-over-year revenue in the first quarter of 2024. Tesla is one of several EV makers that have announced layoffs in recent months.

“Fortunately, the EV market is still small in the U.S. and Chinese EVs are an even smaller slice of that small pie,” Antoni told the DCNF. “Even if the EV market in the U.S. were large, these tariffs would not help the domestic EV industry. While consumer demand for EVs would shift to domestic models, an increase in domestic production would rely on very expensive inputs from China, cutting into profits.”

The White House did not respond to a request to comment from the DCNF.

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Automotive

Governments in Canada accelerate EV ‘investments’ as automakers reverse course

Published on May 15, 2024

By

From the Fraser Institute

By Kenneth P. Green

Evidence continues to accrue that many of these “investments,” which are ultimately of course taxpayer funded, are risky ventures indeed.

Even as the much-vaunted electric vehicle (EV) transition slams into stiff headwinds, the Trudeau government and Ontario’s Ford government will pour another $5 billion in subsidies into Honda, which plans to build an EV battery plant and manufacture EVs in Ontario.

This comes on top of a long list of other such “investments” including $15 billion for Stellantis and LG Energy Solution, $13 billion for Volkswagen (with a real cost to Ottawa of $16.3 billion, per the Parliamentary Budget Officer), a combined $4.24 billion (federal/Quebec split) to Northvolt, a Swedish battery maker, and a combined $644 million (federal/Quebec split) to Ford Motor Company to build a cathode manufacturing plant in Quebec.

All this government subsidizing is of course meant to help remake the automobile, with the Trudeau government mandating that 100 per cent of new passenger vehicles and light trucks sold in Canada be zero-emission by 2035. But evidence continues to accrue that many of these “investments,” which are ultimately of course taxpayer funded, are risky ventures indeed.

As the Wall Street Journal notes, Tesla, the biggest EV maker in the United States, has seen its share prices plummet (down 41 per cent this year) as the company struggles to sell its vehicles at the pace of previous years when first-adopters jumped into the EV market. Some would-be EV makers or users are postponing their own EV investments. Ford has killed it’s electric F-150 pickup truck, Hertz is dumping one-third of its fleet of EV rental vehicles, and Swedish EV company Polestar dropped 15 per cent of its global work force while Tesla is cutting 10 per cent of its global staff.

And in the U.S., a much larger potential market for EVs, a recent Gallup poll shows a market turning frosty. The percentage of Americans polled by Gallup who said they’re seriously considering buying an EV has been declining from 12 per cent in 2023 to 9 per cent in 2024. Even more troubling for would-be EV sellers is that only 35 per cent of poll respondents in 2024 said they “might consider” buying an EV in the future. That number is down from 43 per cent in 2023.

Overall, according to Gallup, “less than half of adults, 44 per cent, now say they are either seriously considering or might consider buying an EV in the future, down from 55 per cent in 2023, while the proportion not intending to buy one has increased from 41 per cent to 48 per cent.” In other words, in a future where government wants sellers to only sell EVs, almost half the U.S. public doesn’t want to buy one.

And yet, Canada’s governments are hitting the gas pedal on EVs, putting the hard-earned capital of Canadian taxpayers at significant risk. A smart government would have its finger in the wind and would slow down when faced with road bumps. It might even reset its GPS and change the course of its 2035 EV mandate for vehicles few motorists want to buy.

Author:

Kenneth P. Green
Senior Fellow, Fraser Institute
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