Environment & energy, Government and governance, Trade and industry, Science and technology | Australia

27 August 2021

A demand-side federal policy akin to the Renewable Energy Target could accelerate the uptake of electric vehicles in Australia, Bennett Schneider writes.

Australian’s love solar power: the country has the highest penetration of rooftop solar photovoltaics (PV) in the world. In stark contrast, Australia is lagging behind other developed nations in electric vehicle (EV) uptake.

Accounting for 17.6 per cent of national emissions, transport is Australia’s third most energy-intensive sector, behind electricity at 33.6 per cent and stationary energy at 20.4 per cent. EVs cannot be ignored if net-zero emissions are to be achieved by 2050.

Policy action at the state level is often incoherent and inefficient. EV manufacturers and industry bodies have long been calling for coherent federal policy, but the federal government has rejected subsidies for EVs, arguing such policy is not the most cost-effective.

The federal government’s assessment ignores the systemic co-benefits EVs offer, such as their ability to enable higher renewable energy penetration as batteries on wheels.

So, what would a federalised demand-side policy for EVs look like? Well, Australia’s electricity sector has been operating under a demand-side policy for renewable energy since 2001 – the Renewable Energy Target (RET).

Here’s how it works. Energy retailers are required to have the target fraction of renewable energy in their portfolios each year. If they fall short, they need to buy credits from renewable energy generators, who create the credits. A higher target increases the demand for credits, which increases their value. This is called a baseline and credit mechanism.

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The credits generated by a rooftop solar PV system are calculated up front for the entire system lifetime based on a well-defined rule of thumb. This allows the new owner of a rooftop PV system to convert all their credits to cash up-front. This is called a capital subsidy, and it can reduce up-front PV system costs by thousands of dollars.

Under the RET, the energy retailers pay, passing their costs through to all electricity customers. Meanwhile, investors in renewable energy, large and small, benefit.

EV uptake could be driven by a system of similar design – simply replace electricity retailers with vehicle manufacturers, substitute electricity consumers with EV customers, and trade emissions certificates under a Transport Emissions Target (TET).

The optimal cost per unit of carbon abated could be achieved by adjusting the emissions target, which would modify the value of the credits and thus, the strength of the subsidy.

Just like the small-scale certificates for a rooftop PV system under the RET, TET emissions credits would be awarded directly to the low- or zero-emissions vehicle consumers upon purchase. The resulting capital subsidy would significantly reduce the up-front cost of a new EV. The number of emissions credits would, like under the RET, need to be calculated based on a simple rule of thumb estimate, so the value of the subsidy can be easily determined and understood by the public.

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Conversely, manufacturers of internal combustion engine (ICE) vehicles, which run on fuel, would be required to purchase credits to offset the lifetime emissions of their fleet that exceed the emissions target. This would increase the upfront cost of new ICE vehicles to consumers.

Therefore, the cost of the TET subsidy is borne by the consumers who continue to purchase new ICE vehicles.

By contrast, Australia’s current state-level tax exemptions and direct subsidies are paid for by all taxpayers, regardless of their behaviour. The TET is much more efficient because it functions as both a carrot and stick for the consumer but does not consume public funds.

California currently operates a similar scheme. Its regulatory credit policy demands manufacturers with ‘dirtier’ fleets purchase credits from those with ‘clean’ fleets. This acts as a carrot-and-stick incentive for manufacturers to invest in developing an EV fleet and divest from their ICE fleet. This will eventually result in cheaper EVs and more expensive ICE vehicles, but benefits to EV consumers are indirect.

Unlike California, Australia doesn’t have any domestic EV manufacturing, so if California’s credits policy was implemented in Australia, much of the benefits would leak outside Australia’s borders. A TET ensures the entire subsidy goes to the Australian consumer, and manufacturers are rewarded with certainty of higher domestic demand for their product.

A TET will make EVs cheaper, but ICE vehicles more expensive, potentially locking lower income households out of the new car market. This issue could be mitigated by offering additional EV subsidies for low-income earners, paid for by increased tax on luxury ICE vehicles or carve-outs for ICE vehicles below a certain price point.

A TET would also subsidise the capital cost of EVs for Australian consumers without increasing taxes. This would give EVs a competitive advantage in the Australian market, incentivising vehicle manufacturers to offer more and cheaper EV models. This, in turn, would drive a virtuous cycle of increased demand and supply, and, if implemented, could be an elegant solution to Australia’s EV woes.

 

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One Response

  1. Kirsten Duncan says:

    Great explanation of EV policies, thanks Bennett. Why is it that the vast majority of articles about EVs appear to assume or promote fuel substitution, ie a 1-for-1 swap of electric cars for petrol cars? There is a range of substantial benefits (health, cost savings, land use, productivity etc) to be gained for individuals, cities, governments, businesses and the environment by swapping private cars for other forms of transport, particularly mass transit (public transport buses, trains, light rail etc – electric of course) and active travel (especially the potential of electric bicycles). These need to be prioritised in all discussions about reducing emissions from transport rather than policies to convince people to replace their petrol car with a new electric car.

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