Federal electric vehicle subsidies cost $355 per tonne of averted GHG, dwarfing price of carbon tax ($65)

A Review of Electric Vehicle Consumer Subsidies in Canada

Globally, the market for electric vehicles (EVs) is expanding rapidly. Last year, worldwide EV sales exceeded 10 million for the first time, representing 14 percent of all new vehicles purchased, up from less than 5 percent in the late 2010s. Rising EV market penetration reflects greater efficiency in EV and related parts manufacturing, improvements in the battery and storage technologies that underpin EVs, and the impact of government policies to encourage the development of the EV industry and boost consumer demand.

This essay looks at EV purchase subsidies in Canada, which have been introduced to accelerate market uptake of these vehicles as part of governments’ efforts to reduce greenhouse gas (GHG) emissions that contribute to climate change. Transportation accounts for almost one-quarter of Canada’s total GHG emissions, so it is not surprising that Canadian policymakers are focusing on emissions from this sector.

The subsidies examined in this paper consist of a national $5,000 EV incentive adopted by the federal government and separate incentives implemented by several of the provinces. We evaluate these incentives through three lenses: efficiency, the impact on carbon emissions from the passenger transportation segment, and equity considerations.

It is important to note that apart from subsidizing the purchase of EVs, governments in Canada have enacted other policies intended to reduce transportation-based GHG emissions. These policies include a minimum national carbon levy, the establishment of electric vehicle production mandates requiring that EVs account for a rising share of all new vehicle sales (reaching 100 percent by 2035), and direct government financing to accelerate the roll-out of EV charging stations and supporting infrastructures. There are also large and rapidly growing government subsidies in Canada for the production of EV batteries and the vehicles themselves, which are not reviewed in this essay.

Our examination of existing EV consumer incentives finds that they are an inefficient way to reduce emissions judged by the cost of abatement, particularly compared to the national carbon levy legislated by the federal government that applies across Canada and is set to climb from $65/tonne in 2023 to $170/tonne by 2030. The inefficiency is partly because some portion of consumer EV purchases would be made absent any subsidy. Of greater concern, the EV purchase incentives in place in Canada today have a cost per ton of GHG abated that substantially exceeds both the national backstop carbon price and most estimates of the broader “social cost of carbon.”

The impact of EV incentives on emissions depends on the types of electric vehicles sold in the domestic market, the “life-cycle” emissions of EVs, and—most importantly—the source of the electricity produced in the various provinces. Increasing EV market penetration is expected to result in lower Canadian emissions in the vehicle segment, but not in a uniform way given the varying fuel mix in the provinces’ electricity sectors. Specifically, in provinces like Alberta and Saskatchewan, where electricity generation heavily relies on fossil fuels, a higher number of electric vehicles on the roads could potentially increase the demand for fossil-fuel-powered electricity, thereby undermining the expected GHG reduction benefits.

Finally, equity considerations are also relevant to assessing EV subsidies. The US academic literature indicates that up to 90 percent of EV purchase incentives adopted by the federal government have flowed to the richest one-fifth of households. To date, most EV buyers in the US and Canada have had incomes well above the respective national average. As more EVs at lower price points enter the market, the picture is likely to change. Unlike the federal government’s EV incentive program, British Columbia’s provincial subsidy includes an income threshold test to help address equity concerns.

We conclude that consumer EV incentives make little sense in Canada. In contrast to the United States, Canada maintains a robust carbon pricing regime which will encourage the shift to lower-carbon energy sources, production methods, and consumption choices. Layering EV purchase subsidies on top of the existing national carbon tax increases the overall cost of carbon abatement and adds to the fiscal burden shouldered by Canadian taxpayers.