Please note! This essay has been submitted by a student.
The aim of this essay is to talk about how subsidies encouraged the growth of electric cars in Norway, their effect and research other examples where subsidies were introduced as well. Nowadays, climate change is a major issue, therefore electric cars are getting more and more popular as they are better for the environment compared to petrol and diesel cars. Are electric cars really better for the environment ?
Electric cars do not emit harmful pollutants such as carbon dioxide, black carbon and nitrogen oxides. Vehicles need expensive road construction as well as substantial maintenance and management costs. Therefore, numerous countries have tax system and Norway is no different. Norway has additionally high excise taxes on gasoline and diesel-fuelled car sales on top of the standard VAT. However, Norway is more leniently of electric cars therefore the growth in electric cars has been rapid there compared to other countries. Fully electric cars represented about 18% of all new sales while plug-in hybrids had represented 17% of the market this growth could be because of Norway’s subsidy policies regarding electric cars.
A subsidy is a payment made by the government to a producer: it is the opposite of tax. The effect of the subsidy is to shift the supply curve to the right leading to a reduction price and an increase in demand. Figure 1 shows that without a subsidy the equilibrium price is $40 per ton and the equilibrium quantity is 40 million tons per year. However, when a subsidy is introduced, the supply curve shifts to the right thus reducing to equilibrium price to $30 per ton and increasing the equilibrium quantity to 60 million tons per year. In this case, the price can be as low as $20 per ton as the quantity demanded will still be 40 million tons per year. Introduction of a subsidy also increases marginal cost due to the fact that more products are being produced. The generous Norwegian electric policy has been gradually implemented during the last 10-15 years and is now an integrated part of the so-called Climate Agreement among the parties in the Norwegian Parliament. The policy is rooted in certain laws and regulations. These laws and regulations, together with the policy measures implemented in some of the main cities, constitute the Norwegian electric policy. It consists broadly of tax exemption package together with certain driving and economic privileges for the users of electric cars. It includes the following points:
• Electric cars exempt from VAT and other taxes on car purchases and sales
• Parking in public parking spaces is free of charge
• The company car tax is 50% lower on electric cars and the annual road tax is also lower
• Battery charging is free at a rapidly growing number of publicly funded charging stations
• Electric cars are permitted to use collective traffic lanes and bus lanes.
These privileges are the reason electric cars are cheaper to run in Norway. Supply and demand curve can be used to understand how the introduction of these subsidies helped the growth of electric cars in Norway. The introduction of a subsidy, in this case the reduction in taxes, cause the supply curve to shift to the right thus lowering the price of electric cars compared to petrol and diesel cars. This also increases the quantity demanded as people save around £1586 because electric cars are exempt from taxes and road tolls. The success of these policies has made Norway a global market leader in the electric car sector, with governments and motor manufacturers from around the world all heading to Norway to learn from what they have achieved, and to exploit opportunities.
Furthermore, the subsidies reflect beliefs that electric vehicles generate a range of positive externalities. An externality is the benefit or cost that affects a party who did not choose to incur that benefit or cost. An externality that provides a benefit is called a positive externality and an externality that imposes a cost is known as a negative externality. One of the positive externalities is decreased pollution emission and reduced consumption of gasoline. Electric cars are better for the environment as they emit less greenhouse gases than petrol and diesel cars. The upstream pollution electric cars produce is considered to be less severe and depends on the electricity source used for battery charging. It could be argued that if the purpose of the electric cars subsidy policy is to reduce local environmental issues, then promoting a switch from diesel vehicles to gasoline models is possibly both a simpler and a cheaper option because electric car subsidies are expensive for the government to run as the electric cars are exempt from paying several taxes and tolls.
Another argument related to electric cars is that electric cars are not necessarily emission free. In the year 2014, the US department of Energy reported that almost 70% of the electricity generated in the US is produced by burning natural gas and coal, which emits high levels of greenhouse gases. Therefore, even though electric cars are not directly contributing climate change, the electricity they require to run is being produced by burning fossil fuels which releases pollutants in the environment.
However, this is not the case for Norway this is due to the fact that most of Norway’s energy is generated by hydropower, which is a renewable energy source. Thus, the switch to electric cars is a much greener equation than it would be for countries, such as US, whose electricity is generated by burning fossil fuels. By using subsidies, Norway’s government are increasing the quantity demanded for the electric cars and lowering the price. Although the country’s extensive charging infrastructure was kick-started by government money, private companies are now taking over operations and there has been a lot of interest from overseas. The government met its target of 50,000 electric cars on the road 3 years earlier than planned. This shows that governments intervention using subsidies is vital as it encourage production and consumption in specific industries. Government subsidies help an industry by allowing the producers to produce more goods and services. This increases the overall supply of that good or service, increases the quantity demanded for that good or service and lowers the overall price of the good or service.
Moreover, there are several other examples available of government using subsidies. For instance, USA’s using agricultural subsidies to increase farmers income. US government gave about $17 billion to farmers per year between the years 1998 and 2004. The introduction of subsidies enables the farmers to increase the supply of their products and lowers the price. Despite, the reduction in price the subsidy still increases marginal cost due to the fact that farmers are producing more products (Kirwan 2009). There are several types of farm subsidies such as insurance, disaster aid and price loss coverage.
Insurance is the largest subsidy programme: subsidised insurance is available for more than 100 crops for example corn, cotton, soybeans, and wheat. Congress has expanded crop insurance to become the largest farm program for a reason. For other farm programs, the identities of the wealthy subsidy recipients are public information, which can be politically embarrassing for farm program supporters. However, with insurance subsidies, Congress basically launders the cash through the insurance firms, which hides the identities of the receivers. Also, unlike other farm programs, there are no income limits on insurance, so most of the money goes to the millionaires and billionaires’ farmers rather than the poor rural farmers. Price loss coverage program payments are only issued when the effective price of a covered commodity is less than the respective reference price for that commodity. The effective price equals the higher of the market year average price or the national average loan rate for the covered commodity (USDA).
However, these subsidies do harm US’s economy. Subsidised crop insurance makes moral risk for farmers, meaning it induces them to make decisions that maximise their subsidies, not market efficiencies. Subsidies tempt farmers to take rash risks since taxpayers will have to pay in case of a failure. Farm subsidies increase land prices and land rental costs because the expected future stream of subsidies is capitalised. As a result, subsidies probably benefit landowners more than farmers, and those are usually different people because more than half of US farmland is rented. As subsidies have pushed up sales prices and rental costs for land, it has become difficult for young farmers to start their own business.
Another of government using subsidies is the introduction of subsidies in the energy industry. The rise in international energy prices has encouraged governments to introduce energy subsidies. Over the past 10 years, the issue of energy subsidies has become an important one for several reasons. Studies indicate that energy subsidies account for a large proportion of the gross domestic product in numerous countries. For instance, in Turkey there has been a huge increase in energy demanded because of the social and economic development. This increase in demand have led to the government to introduce energy subsidies to increase the supply fossil fuels in order to meet the quantity demanded. The Turkish government funds the rehabilitation of hard coal mines and coal power station and funds new coal power plants.
But these energy subsidies do negative externalities that are substantial. Energy subsidies increases the demand and lowers the price of fossil fuels thus leading to overconsumption of them. This contributes to local pollution and global warming because fossil fuels emit greenhouse gases such as sulphur dioxide and carbon dioxide. In other words, they encourage higher levels of greenhouse gases to be released into the environment.
In conclusion, it is clear that subsidies play an important role in causing the number of electric cars to increase. The introduction a subsidy causes the supply to increase and price to reduce as a result the quantity demanded increases. Norway is very flexible with taxes when it comes to electric cars. Electric cars are exempt from road tolls, VAT and other taxes on car purchases and sales. In addition, the company car tax is 50% lower on electric cars and the annual road tax is also lower on them. As a result of subsidies, people are encouraged to buy electric cars because they save a lot money as there is less tax on them. Norway is using these subsidies to encourage the growth of electric cars because they have positive externalities. For instance, they do not emit less greenhouse gases thus reducing the environmental pollution and they also reduce the consumption of gasoline. Other examples of government using subsidies are governments using energy subsidies to meet the high demand of energy and US using agricultural subsidies to increase farmers income. The introduction of certain subsidies does have negative externalities for example energy subsidies encourage higher levels of greenhouse gases to be released into the environment. Finally, we can say that governments should use subsidies that does not cause harm to the environment or contribute to climate change and Norway using subsidies to promote electric cars is smart as they are better for the environment than petrol and diesel cars.