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Junk Science Week — Ross McKitrick: EV mandates don't make economic sense Back to video

According to “energy transition” and “net-zero” enthusiasts, the future looks bright for electric vehicles (EVs). Though not so bright, it seems, that the federal and some provincial governments haven’t had to offer at least $15 billion in subsidies to prompt carmakers to develop Canadian production facilities, as well as lavish subsidies to get people to buy EVs. And since even that isn’t enough to bring consumers around, a Trudeau government mandate now requires that all new light-duty vehicles sold in Canada must be electric or plug-in hybrid by 2035. In other words, the government is banning traditional internal combustion engine vehicles (ICEVs).

The fundamental problem is that EVs cost more to make and operate than most consumers are willing to pay. In a 2016 submission to the Quebec government, which was then considering an EV mandate of its own, the Canadian Vehicle Manufacturing Association warned that its members were then losing between $12,000 and $20,000 per EV sold. Since then, the situation has only gotten worse, with Ford Motor Co. reporting first quarter 2024 losses of US$132,000 per EV.

What will be the economic consequences of a national EV mandate in Canada? In a new paper forthcoming in the peer-reviewed Canadian Journal of Economics, I develop and run a detailed inter-provincial model of the Canadian economy, including the auto sector. I argue that during the phase-in period the sector will raise the price of ICEVs and earn above-market rents on them, but that won’t cover the losses on the EV side so the industry will go into overall losses by the late-2020s. The losses will be permanent unless and until EV production costs fall enough that a mandate is unnecessary. In short, the 2035 mandate is affordable only if it’s not needed. If it takes a mandate to force consumers to choose EVs over ICEVs, the mandate will destroy the Canadian auto industry.

The mandate sets up a race between regulation and technology. Some aspects of EV production are getting cheaper — batteries, for instance. Others, such as specialty metals used in motors, are sole-sourced from China and are not getting cheaper. Other user costs are rising, especially electricity, for which we can thank two decades of green energy madness.

Taking all aspects together, suppose EV technology improves so quickly that by 2035 consumers are absolutely indifferent between an EV and an ICEV, meaning the mandate is costless thereafter. Getting to that point would still impose Canadian auto industry losses that total $140 billion compared to the no-policy base case. As of 2031 the losses in real GDP and industrial output compared to the base case would average more than $1,000 per worker across Canada. As of 2035, greenhouse gas emissions would fall by just under three per cent relative to the base case, but the abatement costs reach about $2,800 per tonne as of 2030.

And that’s the best-case scenario. What if full EV cost parity takes until 2050? According to the model, the auto sector will lose $1.3 trillion relative to the base case between 2025 and 2050. In reality, a sector losing that much money would simply shut down, but in the model a sector must keep operating even at a loss. In absolute terms, the national economy would continue to grow but much more slowly. Economic outcomes relative to the no-policy base case as of 2035 include a 4.8 per cent reduction in real GDP nationally (8.9 per cent in Ontario), 2.6 per cent lower real earnings per worker, 137,000 fewer jobs, 10.5 per cent lower auto demand and 16.8 per cent lower capital earnings. Greenhouse gas emissions would fall by just under six per cent against the base case as of 2035 but at a cost of more than $3,400 per tonne, 20 times the 2030 nominal carbon tax rate, which represents the government’s estimate of the social costs of greenhouse gas emissions.

These are unprecedented costs, but then again we have never before proposed to ban the production and purchase of one of the most popular consumer products of all time. A large part of our economy is organized around making and using gasoline-powered cars. It should not be surprising that the government outlawing them would have harsh and far-reaching economic consequences.

While production of EVs will partially offset the losses, it’s a classic error in economic reasoning to suppose the policy package as a whole could yield a net gain or offer a genuine economic opportunity. If it could, think of all the economic growth we could contrive simply by banning things. We could ban computers and make people read books instead — book publishing would boom. We could ban all forms of transportation and make people walk. Think of how much money they’d save, and the opportunities this would open up for shoemakers.

I better stop there before I put ideas in politicians’ heads. To be clear, people are willing to pay for computers, cars and lots of other things because they perceive that they generate greater consumption value than they cost to buy. So far that has not proven to be true of EVs, so an EV mandate by definition must make people worse off. No one had to force the public to abandon land lines for cellphones, or vinyl records for CDs and then online streaming. When superior products appear, people switch voluntarily. An EV mandate may be affordable by 2035 — but only if the product quality and user costs have progressed to the point that people want to switch anyway, in which case the mandate is not needed.

Will an EV mandate destroy the Canadian auto industry and impose serious harm on the Canadian economy? There’s a simple way to tell: if the government concludes, based on trends in vehicle sales data, that a mandate is necessary to force consumers to switch, the answer is yes.

Ross McKitrick, professor of economics at the University of Guelph, is a senior fellow at the Fraser Institute.