You’re doing what with my money?
The recent news that both that both the federal and Quebec consumer zero emission vehicle purchase programs had run out of money and were going into hiatus shocked both industry and consumers. In Quebec, the near simultaneous halt of the two programs meant that vehicle purchasers were faced with a $12,000 swing in transaction prices for qualifying vehicles in the span of a month. Anyone who thought that the pace of EV sales in Canada represented natural demand is about to crash into reality. Meanwhile, car dealers and OEMs are being asked to honour the value of the recently lapsed rebates by consumers who were convinced to order vehicles based upon advertised government incentives.
It has always been my view that governments should stay out of the consumer incentive business. These subsidies tend to go to people who have the economic ability to buy a new car anyway but who might (and I stress might) be triggered to get into the market sooner as a result of the financial incentive. But even in the case of the higher income earners who are able to benefit from these programs, not everyone is ready or can afford to purchase a new vehicle now. Meanwhile, monies that could be invested to the general benefit of the public in things like infrastructure, are held for distribution to select individuals. And because these programs are costly, they always end up being time limited. Therein lies the rub.
Forget the even higher rebates available that were available in Quebec, it should have been obvious to any Canadian that the federal government’s ambitious targets for ZEV sales in the early 2030s could not be subsided to the tune of $5,000 per car. The math is simple. The Canadian government set an annual target for 2030 that 60% of all vehicle sales would be zero emission. Based on a 2 million unit market at $5000 per car, those incentives would amount to $6 billion of federal expenditures in 2030 alone. This was clearly unsustainable.
It is true that consumer incentives do the job of pushing demand above the natural market for the incentivized products. Arguably, that is what governments are attempting to achieve when introducing these programs. Set an ambitious target for zero emission sales by a certain date and a consumer subsidy will both kick start the market and encourage manufacturers to bring more product to market.
The difficulty with the theory becomes apparent in cases where the product being incentivized is limited by its supply chain or represents net new technology that is in the early stages of commercialization. Under those conditions, demand can quickly exceed supply. Companies maximize revenues while vehicles production trails this artificial level of demand and consumers grow increasingly frustrated trying to find a qualifying vehicle.
In the medium term supply and demand start to rebalance as manufacturers catch up with early demand. It is at that point that incentives typically run out and then demand collapses leaving manufacturers with surplus production. There are recent examples of this in Ontario and Germany, where sales of electric vehicles plummeted following the elimination of government incentives to consumers.
But that isn’t the only time that these strategies break down. A good example can be seen in the case of the Eco Auto Rebate in Canada. This was a program that was designed to incentivize Canadians to purchase more fuel efficient vehicles. It offering incentives for the most efficient vehicles in defined categories. The rebate was introduced in the 2008 federal budget. Because of the specific fuel economy target for subcompact cars, the only eligible vehicle in the class was the Toyota Yaris, cutting out competition from other makes such as Honda and Hyundai.
The Yaris was already the top selling vehicle in its class. Because the rebate was introduced late in the model year all of the available production for Canada had already been planned. Where demand takes off in either Canada or the US, it is sometimes possible to redirect vehicles from one market to the other. Yaris was a vehicle sold in small numbers in the US. Meaningful additional volume was therefore not available in the, then, current model year.
The result was that buyers lined up to buy Yaris and claim the rebates, shunning competitors’ vehicles. Toyota was able to limit its own incentive spending while Honda and others were forced to cut margins and reduce transaction prices. At the same time, Yaris sales did not climb significantly above planned volume because there was limited additional production that could be directed to Canada. The program cost taxpayers but did little to achieve the goal of reducing fuel consumption. By picking winners and losers, the Canadian government enhanced returns to Toyota and penalized other makers of small, fuel efficient vehicles.
The program had a further perverse effect. In order to ensure that the Honda Fit was eligible for the rebate in the following year, Honda considered various strategies to reduce the weight of their vehicle and thereby improve fuel economy to meet the program requirements. Among the possibilities considered by Honda, according to a company spokesperson at the time, was the elimination of side air bags or other optional safety equipment. Ultimately, Honda decided to delete the heavy spare tire in favour of a tire inflation kit. As a result, the Fit qualified for the second and last year of the program.
Ultimately, complaints from both industry (from those whose products were not eligible for incentives) and from consumers who were not able to take advantage of the program led to the demise of the Eco Auto Rebate.
Canada has seen federal and provincial incentive programs introduced by political parties of all stripes. Cutting cheques to voters is a popular political strategy. The end result is always the same. Some people disproportionately benefit from the handouts while everyone pays and the program ultimately collapses. The end of ZEV rebates represents a good opportunity for a reset of government policy. Will we refocus on longterm, sustainable investments?
In the face of growing protectionism and falling incentives, the Canadian EV market is facing an unpredictable 2025.
the Beatty Blog 
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