by Bill O’Keefe
The Virginia General Assembly, as a result of past Democrat control, has mandated through the Clean Economy Act and a 2021 law a low-emission and zero-emission motor vehicle program for model year 2025 and beyond. In the process it has demonstrated the folly of using technology to force through large subsidies, as well as the arrogance of legislators who believe they know more than consumers and providers.
It is becoming ever clearer that these mandates are based on wishful thinking and a failure to understand innovation technology, the importance of cost, and the sources of global emissions. Back in 1980, President Carter and Congress established the Synfuels Corporation to develop alternatives to oil. Its initial funding was $20 billion, but fortunately it wasted only $960 million while making OPEC stronger. The history of government attempting to pick winners because it is smarter than the private sector is littered with failed efforts. But politicians never learn.
There are now regular reports of offshore wind platform companies cancelling or renegotiating contracts because of escalating costs. According to Barrons, “the industry is teetering, with a parade of companies planning to renegotiate or pull out of contracts, jeopardizing plans for projects that were expected to provide electricity for millions of homes.… At least eight multinational companies in three states have quietly started to back out of wind contracts, or ask to renegotiate deals in ways that will pass more costs to consumers.”
The picture in Europe is not better. Companies in Germany are taking their investments elsewhere due to high electricity costs and inflation, while the United Kingdom is being confronted by citizen anger and a political backlash because of its extreme net zero policy. None of this would likely be happening if subsidies, unrealistic assumptions and mandates had not pushed a technology before its time.
The same problems confront EVs, whose sales have been propped up by large subsidies, but now may be stagnating as unsold inventories grow.
There is a growing reluctance to buy EVs, according to some surveys, because of price and concerns about range. According to Cox Automotive, “It’s a “Field of Dreams” moment for automakers making big bets on electrification — they’ve built the cars, and now they’re waiting for buyers to come.”
In addition to the cost of electric vehicles, consumers are concerned about range. To counter the concern about range, manufacturers are increasing the size of battery packs, adding up to 900 lbs. to the weight of an EV, which, by the way, also adds to the emissions from mining the metals needed to produce those larger batteries.
The price barrier is only going to get worse because fewer models now qualify for the $7,500 subsidy. Germany, for example, has discovered that when subsidies are removed, demand drops. According to Market Insider, “Sales of fully electric vehicles (EVs) fell 13.2% in January compared to January 2022.… The main explanation is the end of Berlin’s subsidies.” All of the barriers to growing sales are not going to be overcome soon, which is a good thing.
If the real concern is to reduce carbon emissions, EVs are not the best way to reduce emissions. Hybrids are. Holman Jenkins of The Wall Street Journal writes that “our policies don’t exist to incentivize carbon reduction, they exist to lure Americans to … EVs.” He points out that the same battery minerals in one Tesla can supply 37 times as much emission-reduction when distributed over a fleet of Priuses. So, instead of technology-forcing, the government should be promoting hybrids and battery technology research, as Toyota is doing. Toyota is developing a solid state battery that will have a range of over 700 miles, but it won’t be commercially available until model year 2027 or 2028.
So, why do governments fail all too often in picking winners and promoting technology?
First and foremost, they always feel that they must do something but technological innovation is not cleanly plannable. Studies have shown that innovation is characterized as much by false starts, missed opportunities, and lucky breaks as it is by brilliant insights and smart decisions.
Second, governments have no special knowledge about profitability and commercial potential, which is influenced by many variables and proprietary information. Detailed knowledge of a technology, its strengths and weaknesses, and user needs is essential to guide the process to a successful conclusion. These factors are serious constraints on what government can do effectively.
There is a counter-argument that is often used to challenge statements about the limits of government picking winners and forcing technology. And that is the development of the catalytic converter to comply with 1970 Clean Air Act mandates. The problem is that GM, which at the time had a 75% market share, had already spent millions of dollars on catalytic converter research. Its CEO in the spring of 1970 said that GM would meet the mandates if oil companies removed lead from gasoline. In other words, he took advantage of the Clean Air Act to recapture money already spent by short-circuiting research into alternatives that might have turned out to be more cost-effective.
The bottom line from most research about government technology-forcing is that it should be limited to where the government is the “user-demander” and to supporting generic research that eventually can be commercialized. This of course requires a level of patience that is not evident in most government officials. The Reason Foundation made the point very clearly: “Government research subsidies and those who argue for them also tend to overlook a very important part of the technology diffusion process: consumer demand. Technologies that do not meet consumer needs for practicality, convenience, carrying capacity, power, and aesthetics will fail, regardless of their scientific virtuosity or cost-effectiveness. Failure to take into account consumer demand even further inhibits the ability to pick winners, and also point to another difference between private investment processes and government subsidy processes.”
While EVs and offshore wind may eventually play a large role in our energy mix, that time is not near. In the meantime, there are actions that can be taken to reduce and slow the growth of carbon emissions. First among them is transferring energy technologies to developing countries that rely on high carbon fuels for energy, although until China and Russia get serious about emission reductions, progress will be slower than it could be.
Bill O’Keefe is a former executive vice president of the American Petroleum Institute and founder of Solutions Consulting.
