Some commentators have dubbed the incoming Government coalition between the Conservatives and the Liberal Democrats as heralding the Age of Austerity for the UK. Spending cuts totalling £6bn have already been announced and it is without doubt that much more will be on the cards if the public deficit and debt burdens are to be reduced. This action is without doubt required, southern Europe has already experienced a sovereign debt crisis last month and financial markets are looking very unnerved. If the UK Government does not take action to curb the deficit (which stands at £156bn this tax year) then Government debt repayments could amount to more than £70bn per year.
People are obviously very keen to find out exactly where the axe will fall. Education and the NHS appear to have their funding ring-fenced with David Cameron’s commitment not to cut essential services. We may have to wait until the emergency budget is announced by George Osborne on June the 22nd before we know exactly the scope of the reductions but speculation is rampant. The £5000 incentive grant earmarked to come online in January next year to assist consumers in purchasing a Electric or Plug-In Hybrid Electric Vehicle has been muted as a likely victim of the new regime.
Now we’ve already reviewed this proposed incentive grant here in this blog but in light of the emerging financial conditions it is perhaps best not only to look at its benefits but its associated costs as well. Without doubt this grant will help in accelerating the uptake of Electric Vehicles in the UK. One of the biggest barriers consumers express about buying an EV is the upfront cost premium related to the advanced technology. This premium will be recouped throughout the lifetime of the vehicle by substantially cheaper operating costs but consumers appear to have very high discount rates making these savings appear much less important. Society will garner a benefit for each EV on the road from reducing air and noise pollution so there is a case for some financial assistance to be offered towards consumers of EVs.
If the UK Government is serious about promoting the development of green industries then it couldn’t do much better than backing EVs. The UK already has a well established automotive industry and the future potential and rewards of getting in on the EV market early could be huge. As with almost all advanced technology ventures, upfront capital will be required to establish the industry before the rewards in the form of profits and jobs will begin to flow. The government needs to nurture these emerging green industries if they are to flourish in the future.
On the other hand, the £5000 incentive grant has the potential to be exceptionally costly to the Government. Nissan announced that it will be building fifty thousand EVs in its Sunderland plant. If only say twenty thousands of these vehicles went to sale in the UK market, then the subsidy bill for the government (without administration costs) would amount to £100million per year. If you view the main output of this policy as reducing CO2 emissions from transport, that sum equates to a very large price per tonne of carbon saved. It may prove better to channel the funds into other areas that are more cost effective (lower marginal abatement costs) at mitigating carbon (or simply cut the funding completely to reduce government expenditure).
Perhaps the EV incentive grant was conceived it a time where economic prospects were much brighter, sovereign debt was not seen as being a potentially catastrophic issue and the Government had the flexibility to consider climate change and sustainability (other than in its economic sense) as an important issue. If the grant is scrapped then it would increase the price of a Nissan Leaf to £28000 putting it well beyond the realms of most family buyers and substantially more expensive compared to its conventionally powered compatriots. The economist in me can see strong justifications for why the scheme should be shelved however I also know that the next few years will be a critical time for EV development in the UK. With the government already committed to installing an extensive recharge infrastructure (especially in London where 25 000 recharge points will be built) at the cost of tens of millions to the taxpayer, it would be a real shame if the vehicles were not on the roads to make use of these facilities.
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