Fight over grants for EVs shows that climate policies need an endgame.

Apr 6, 2021

Arguments over cuts to the Plug-in Car Grant are a symptom of an old-fashioned climate policy, argues Ed Birkett.

 

Last month the Government announced a surprise cut to the grants available for buyers of new electric vehicles (EVs) and restricted eligibility to only the cheapest models.[1] The cut is the Government’s response to the growing popularity and falling prices of EVs, which threatens to blow the budget of the UK’s grant programme. The design of the grant programme sets up the Government to fail – to be seen as the climate Scrooge in the same year it hosts COP26, constantly intervening to cut support for EVs just as more drivers look to take the plunge.

It doesn’t have to be this way. The Government must move beyond setting defined levels of support, only to have to cut them in future. Instead, we need climate policies that are designed to make themselves redundant when they’re no longer needed.

The Plug-in Car Grant sets up the Government for continued battles with industry and drivers.

Under the UK’s Plug-in Car Grant, the Government sets a fixed cash grant available to drivers. As EVs get cheaper, the level of support should reduce; both because it’s no longer needed and because the cost to the Government will increase. Over time, the Plug-in Car Grant has reduced from £5,000, to £3,500, then £3,000, and now to £2,500.[2]

These types of policies are only cost-effective if the Government gets the level of support right, and quickly reduces support as costs fall. But even if the Government sets the grants at the right level, they will still face vocal criticism whenever they reduce the support, even if the cuts are justified by falling prices.

We saw similar issues with the Government’s support for low-carbon energy projects through the Feed in Tariff,[3] the Renewable Heat Incentive,[4] and the Renewables Obligation.[5] In each case, the Government set the subsidy level for each technology and adjusted it downwards over time.[6] Whenever the Government reduced the subsidies, they were met with howls from industry and customers about how they were killing the industry. Of course, it was in the interest of industry and customers to say that.

Thankfully, the Government has reformed energy subsidies so that it no longer sets the level of most subsidies. Instead, the Government invites industry to bid for contracts at the lowest price they can offer as part of the Contracts for Difference scheme.[7] Far from killing the industry, this approach led to price falls that even the most ambitious forecasters would have struggled to predict; and all without criticism of the Government.[8] Falling subsidies were transformed from being the sign of a heartless Government to the sign of a competent administration securing value for money for taxpayers and accelerating the transition to Net Zero.

As a result of these changes, government subsidies for wind and solar farms are well on the way to making themselves redundant; in a recent report, Powering Net Zero, we argued that further tweaks to the subsidy regime would continue this process.[9] Unfortunately, subsidies in the transport sector still resemble old-fashioned fixed subsidies.

The Labour Party’s proposals on EVs risk falling into the same trap that the Government is in with the Plug-in Car Grant. Shadow Business Secretary Ed Miliband is calling for interest-free loans for those on lower incomes to purchase EVs.[10] Targeting the policy at those on lower incomes limits the cost of the scheme; however, as with the plug-in car grant, it’s hard to know how generous the scheme should be, and it would be politically difficult to wind down the scheme when it is no longer needed. In addition, Labour is proposing interest-free loans to finance the purchase of second-hand vehicles, a policy whose main effect is likely to be raising the prices of second-hand EVs.

A mandate for EVs would allow incentives to rise and fall automatically as needed.

The transport sector is clearly different to the energy sector, with drivers buying vehicles rather than the Government doing so. The Department for Transport shouldn’t start procuring Teslas and Nissan Leafs through competitive auctions, but they can still design a system that automatically becomes redundant as EVs drop in price.

In a report published last year, Route ’35, we recommended that the UK should implement a California-style Zero-Emission Vehicle mandate (‘ZEV mandate’).[11] Under a ZEV mandate, manufacturers are required to sell more EVs each year, or to buy credits from those who do. The beauty of the scheme is that the price of ‘ZEV credits’ automatically rises and falls to ensure that the phase-out is delivered. If the price of EVs falls quickly, then drivers will buy more EVs and the price of ZEV credits will go to zero, because the supply of credits would exceed the regulated minimum; the ZEV mandate makes itself redundant.

A ZEV mandate should be complemented by public investment in EV charging infrastructure and industrial strategy to support domestic manufacturers, so it isn’t a silver bullet. However, it would deliver the phase-out of new petrol and diesel cars and vans, without the Government ever having to cut a single grant or tax relief; tax reliefs like the Company Car Tax relief for EVs that are likely to be the Government’s next big fight.[12] As we move to the next phase of climate policy, we must learn from our successes in the electricity sector by designing policies with a clear endgame, making themselves redundant as the cost of low-carbon alternatives fall

[1] Jolly, J. The Guardian (March 2020). UK slashes grants for electric car buyer while retaining petrol vehicle support. Link

[2] DfT, OZEV (March 2020). Update on plug-in vehicle grants following today’s budget. Link

[3] CMS (October 2011). UK Government proposes cut to Feed-in Tariff for Solar PV. Link

[4] Energy Saving Trust (undated). Renewable Heat Incentive. Link (see section “Elements affecting payment”)

[5] UK Government (undated). Renewable Obligation: Banding levels 2013-2017. Link

[6] In the case of the Renewable Heat Incentive, support levels fell automatically based on the number of installations, known as “digression”.

[7] BEIS (Updated March 2020). Contracts for Difference. Link

[8] KPMG (September 2019). Blown away: CfD Round 3 delivers record low price for offshore wind. Link

[9] Policy Exchange (December 2020). Powering Net Zero. Link In Powering Net Zero, we proposed a “floor-price CfD” as an amendment to the current Contracts for Difference (CfD) scheme.

[10] Labour List (March 2021). “This is the DNA of Labour: green and fair” – Miliband’s green recovery speech. Link

[11] Policy Exchange (July 2020). Route ’35. Link

[12] HMRC (accessed March 2021). Company car benefit – the appropriate percentage (480: Appendix 2). Link.

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