We need a carbon ceiling, not subsidies, to cut car emissions

Our politicians have put very different policies on the table. Federal Labor is offering an electric car discount to make select electric vehicles cheaper, with those priced below $77,565 to be exempt from the 5 per cent import tariff and fringe benefit taxes. The federal government is investing in charging stations for electric vehicles. And the NSW and Victorian governments offer $3000 subsidies for electric vehicles that cost less than $68,740.

Talkback radio, letters to editors and chat boards demonstrate strong public support for subsidies – who doesn’t like free money? But subsidies aren’t the best way to reduce emissions from light vehicles. If we’re serious about reducing emissions from our cars, we need a serious policy: one that is clear about its goals, and how it will achieve them. And if we’re sensible we’ll use a policy that doesn’t cost taxpayers money. The Grattan Institute’s car plan explains why a carbon emissions ceiling is the best tool for the job.

About 11 per cent of Australia’s annual emissions come from passenger and light-commercial vehicles. Cars are usually kept on the road for at least 15 years, so to reach net-zero emissions by 2050 we need to stop selling cars that emit carbon by 2035.

Our proposed ceiling would impose a limit on the emissions allowed from all new passenger and light-commercial vehicles sold in Australia each year, and this ceiling would ratchet down to zero in 2035.

The first problem with subsidies is that they don’t guarantee carbon reductions. It is possible to subsidise electric vehicles and boost their uptake, but to lose these carbon savings if there are higher sales of other vehicles that emit more carbon. And subsidies don’t create any incentive for manufacturers to offer lower-emissions diesel or petrol vehicles, which means we’re ignoring other technologies that could help with the emissions-reduction task.

We need a fleet-wide policy. Under the Grattan plan, manufacturers could choose how to come in under the ceiling, using a mix of reduced emissions from petrol and diesel cars, and increased sales of electric vehicles. Our modelling demonstrates that a well-designed emissions ceiling would save 20 to 30 Megatonnes of carbon before 2030, equivalent to 40-50 per cent of the emissions reductions Australia needs to meet its commitments under the 2015 Paris Agreement. Emissions ceilings have been imposed across 80 per cent of the world’s light vehicle fleet. They work.

A second problem with subsidies is that they don’t bring down prices in the longer term, or increase the variety of electric vehicles available to Australians. A ceiling harnesses manufacturers’ knowledge about their vehicles and their consumers, and creates an incentive for them to sell zero-emissions vehicles to a range of buyers. Last year in the UK, which has a ceiling, consumers could choose from more than 130 zero-emission vehicles, at a range of prices. Here in Australia we had a scant 30 electric vehicles to choose from, with only 14 under $65,000. A ceiling makes manufacturers responsive to emissions targets – and consumers’ budgets.

So, subsidies don’t guarantee emissions reductions, and they don’t create incentives for manufacturers to reduce prices or increase the variety of electric vehicles. But subsidies do use taxpayer money to subsidise some people’s purchase of an electric vehicle. And evidence from overseas suggests those subsidies will go to wealthier drivers – who don’t need taxpayer help to buy an electric car.

This means that the environmental and consumer benefits of subsidies are questionable, except for the group of consumers who directly benefit from subsidies. The equity implications are problematic. Why, then, are subsidies so popular with governments?

There’s a view that we need to stimulate the market – to get the ball rolling, at any cost – because Australia’s sales of electric vehicles are so far behind the rest of the world. But consumer surveys show that Australians are very interested in electric vehicles. And sales are growing fast from a low base. In the first six months of the year, more electric vehicles were sold here than in all of 2020. Plenty of people would like to buy electric vehicles.

The best way to get more electric vehicles on our roads is for the federal government to introduce a policy that makes more electric vehicles more available each year. And an emissions ceiling would deliver for the environment, for taxpayers and for consumers.