A push for widespread electric vehicle usage could cause some economic discomfort.
The promotion of green energy investments has become a predominant public policy initiative for many governments. This forced transition, however, has the potential to induce supply shocks. This is especially true given that the rate of innovation necessary to efficiently harmonize the use of renewables and fossil fuels is slower than that of the transition ambition.
In Germany, for example, investments in wind and solar energy have significantly increased power generation capacity, outstripping demand and adversely impacting the power industry’s productivity.
Transition costs are not limited to Germany. A recent study by Pisani-Ferry and Mahfouz suggests that a move to green energy is likely to induce lingering inflation and decreased productivity until 2030.
Proponents of the transition hope that innovation will come quickly. Many point to China’s apparent success with EVs. Massive public investment has made EVs cost competitive with combustion-engine cars. As the chart below shows, the price of a battery back has decreased significantly since 2013.
However, underpinning China's apparent EV success is public funding. China is notorious for state-led investment schemes. However, such schemes have caused problems for the nation’s economy, such as a real estate crisis and rising public debt. Across the globe, most green investments are publicly funded. This is because private capital has not yet been fully enticed: many green investments are not “cost-competitive” with comparables.
China’s progress also reflects that the West is seeking a green transition on its own terms, not one driven by a systemic rival. The Biden administration recently announced a new tariff regime that could set import duties on Chinese EVs up to 100%.
The green transition is also a “tough to swallow” pill for consumers and voters. Paying upfront costs to delay the distant and ultimately theoretical costs of disaster is difficult. It requires a painful “here and now” to thwart a potentially disastrous “later.”
Source: Stephen Wilmot, WSJ; Tanner Brown, Barron’s; Micah McCartney, Newsweek; Alan Rappeport and Jim Tankersley, The New York Times
Reade Ben is a policy analyst at the Manhattan Institute.
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