Currently, plug-in hybrid electric vehicle (PHEV) incentives are offered by the U.S. federal government, 20 U.S. States, three Canadian provinces, a dozen European nations, Japan, China and other entities.
Auto manufacturers and their early adopter customers know first-hand that tax incentives are playing a critical role in creating and scaling up the new plug-in transportation industry. Thanks to these incentives, the question of “Is plug-in transportation technology viable?” has been answered. The verdict, by more than a dozen auto manufacturers and 100,000 consumers is a resounding YES.
Over the last year, as plug-in vehicle sales started to ramp up, so has the call from critics to curtail taxpayer supported incentives. Critical questions now hang in the air. Do tax incentives work, and if so, how long should they be utilized, and how much money is this going to cost?
The obvious way to answer this question would be to look at the history of previous tax-based energy incentive programs. Governments of all types around the world have tried different approaches to supporting emerging energy technologies in pursuit of political goals. These goals could be to drive innovation, create jobs, protect the environment, or enhance national security.
It is no secret that historically global subsidies for fossil fuels have outweighed assistance for green alternatives. But hidden inside this simple fact is the answer we seek. As a Canadian I would like to relay some hard-won experience with our unconventional oil industry that played out in my backyard for over a quarter of a century. In 2013, those of us in favor of plug-in transportation now face the same questions that confronted the oil sands industry in 1993. These are: What will it take to scale up to a volume that will lower costs to an economically competitive point? Is this “critical mass” goal worth the cost to the taxpayer?
Until 1973, Canada relied on the free market to develop its energy potential and was still dependent on foreign oil. The creation of OPEC and the oil embargo of 1973 changed everything. Nothing says economic apocalypse to a voter like freezing in the dark as your political leaders go begging cap in hand to a Middle East dictator. Thus was born a government-owned oil company, Petro Canada, and the dawn of an open public purse in support of any energy idea. Out of the ensuing decade of unprecedented turmoil, waste, pork barreling, and just plain bad ideas, emerged a home run.
2013 is the 20th anniversary of a sea change moment for the Alberta Oil Sands. In 1993 the Alberta provincial and Canadian federal governments shifted tactics in their attempts to support the fledgling oil sands industry. The tactic of billion-dollar public grants for private enterprise was stopped by both the Alberta and Canadian governments’ ballooning deficits. The only good news, after decades of effort and billions invested from the public purse, oil sands extraction technology was finally ready for rapid expansion to the scale needed to be economical. But with world oil prices at a 20-year low, the whole industry was instead staring at disaster.
In 1993, this pressure brought two notorious political opponents, Ralph Klein (then Alberta’s conservative premier) and Jean Chretien (then Canada’s liberal prime minister) together on a new course of action. Their solution was to create a joint task force to implement extensive tax breaks supporting oil sands development. Starting in 1995, companies could write off 100 percent of their capital costs, including overruns, in the year they were incurred. The wellhead tax was reduced from 25 percent to 1 percent on oil sands revenues until capital costs were paid off.
The outcome was a flood of oil sands spending in the province. Almost overnight an industry that had a questionable future with a handful of government supported projects, exploded with activity. Even with the world price of oil well below production costs, private corporations (including American multi-nationals) decided to take the risk, incented with the right tax breaks.
Fast forward to today. After 15-plus years of support, the oil sands industry has scaled up to the point where it is hitting pay dirt. Thanks to the success of its energy policies Canada is not only energy independent but becoming a major oil exporter and the tax incentives that drove this development are being gradually phased out. The message behind this success is clear. A government interested in furthering the development and commercialization of new energy technologies need look no further than its own tax system.
What if other governments trying to support new energy technologies, such as electric vehicles, provided the same level of support that enabled the development of the oil sands and Canadian energy independence? That’s an average of $1.4 to $2.8 billion in tax incentives provided to the Alberta oil industry every year from 1995 to 2010 or about $50 billion in today’s dollars adjusted for inflation. On a per capita bases this amounted to $100 a year, per Canadian, for 15 years.
For America this would equate to $500 billion over 15 years. Currently, if all of President Obama’s energy reforms are successful (which range from reforming the old Bush era EV tax credit with a new rebate, to the recently purposed Energy Security Trust Fund) he will still fall short of this level of effort by a factor of 10.
The scale aside, does turning the Taxman into an EV (electric vehicle) salesman hurt or help the economy?
Here is a key point that should help you decide. While it may be true that Canadians forgave tax and royalty revenues on the oil sands for 15-plus years, the economic activity it created pumped billions of dollars a year into the economy that more than offset that number. The money “lost” in tax and royalty forgiveness was an investment, not a real loss. In economic terms it traded an opportunity cost or an opportunity lost, to create a booming new industry.
In the same way, providing billions in PHEV tax credits to business and consumers will pay for itself many times over. Incenting the purchase of a new locally produced and fueled vehicle to replace an old one fueled by imported oil will achieve energy independence and reverse the squandering of wealth on importing oil controlled by unfriendly governments.
Ralph Klein passed away on Friday, but not before seeing the success of his economic policies and, at least while he was in office, both a balanced provincial and federal budget.
It is possible that current PHEV technology and product offerings can continue to scale up and reach critical mass without new incentives. But this technology is fighting both the lingering effects of oil subsidies (as did Alberta’s oil sands) as well as a range of vested interests both foreign and domestic. The fact that this technology has already made inroads to the level it has is a testament both to its current strength and future potential. A historically appropriate level of incentives will level the playing field and secure a brighter economic future sooner.
Mark Brooks contributes to this Web site from time to time with his perspective as a Canadian and electrified vehicle proponent. He is a commercial pilot, flight instructor and owner of a 2012 Chevy Volt.