Electric vehicle subsidies make little sense in Canada

Electric vehicle subsidies—that is, when government essentially pays people to buy electric vehicles—are an expensive way to try to reduce greenhouse gas emissions.

First, some context. Globally, the market for electric vehicles (EVs) is expanding briskly. Last year, worldwide EV sales exceeded 10 million, representing 14 per cent of all new vehicles purchased, up from less than 5 per cent in the late-2010s. EV sales have slowed recently, but this is probably a temporary lull. Rising EV market penetration reflects technical advances in EV and related parts manufacturing, improvements in battery and storage technologies, and the impact of government policies aimed at boosting the industry and increasing consumer demand.

As part of a broader effort to reduce greenhouse gas (GHG) emissions that contribute to climate change, governments in Canada have introduced purchase subsidies to accelerate EV sales, established sales mandates requiring that EVs comprise a rising share of new vehicle sales (reaching 100 per cent by 2035, according to federal decree), and provided direct government financing to support the roll-out of EV charging stations. Transportation accounts for about one-quarter of Canada’s emissions, so it’s not surprising that policymakers have focused on this sector. EV subsidies include a national $5,000 purchase incentive from the federal government and separate incentives in several provinces.

But according to a new study, EV subsidies are an expensive way to try to reduce emissions. Why? Because a substantial portion of EV sales would be made without any subsidy—many who buy them today would still do so without a gift from government. And more importantly, EV subsidies have a cost (per-tonne of GHG abated) that markedly exceeds both the federal government’s carbon tax, which is set to climb from $65 per tonne in 2023 to $170/tonne by 2030, and most estimates of the broader “social cost of carbon.”

Moreover, the impact of EV incentives on GHG emissions is complicated, depending on the types of EVs sold, the “life-cycle” emissions associated with the entire EV supply chain, and the sources of the electricity used to run these vehicles. More EVs on the roads should produce lower Canadian vehicle emissions, but not in a uniform way given the varying fuel mix in the provinces’ electricity sectors.

Finally, equity considerations are also relevant in assessing EV subsidies. The academic literature in the United States finds that 80-90 per cent of EV purchase incentives have flowed to the richest one-fifth of households. To date, most EV buyers in the U.S. and Canada have had incomes well above the average—again, casting doubt on the need for subsidies. Although as more EVs at lower price points enter the market, the situation may change.

The study concludes that consumer EV incentives make little sense in the Canadian context. In contrast to the U.S., Canada maintains a robust carbon-pricing system that—over time—should encourage a shift to lower-carbon energy sources, production methods and consumption choices (including for passenger vehicles). Again, according to a Trudeau government mandate, by 2035 all new vehicles sold in Canada must be electric. By layering EV purchase subsidies on top of these other policies, policymakers are increasing the overall cost of carbon abatement and adding to the fiscal burden shouldered by Canadian taxpayers.