Blog Post

Advanced Technology Vehicles: The Chicken and Egg Conundrum

May 10, 2012 | Beia Spiller

Over the past 30 years, the government has spent billions of dollars in attempting to promote the adoption and utilization of advanced-technology vehicles, including those that use alternative fuels (such as the ethanol fuel blend E85 and natural gas), hybrid and battery electric vehicles, and fuel-celled vehicles. The extensive list of policies includes tax credits to ethanol producers, renewable fuel mandates, vehicle purchase tax credits, investments in R&D, allowances in efficiency standards for manufacturing these vehicles, and assistance in installing alternative refueling stations.

Yet adoption is still critically low: alternative vehicles account for only approximately 10 percent of all new vehicle purchases, the majority of which are E85 vehicles that are predominantly used with gasoline. In fact, there is evidence that most flexible-fuel vehicle (FFV) owners are unaware of the fact that they own a vehicle that can run on anything other than conventional gasoline. Even if they knew, it is unlikely any FFV owner would not refuel with gasoline—it is generally the only option they face.

At the beginning of April, the MIT Energy Institute (MITEI) held a symposium on prospects for flexible- and bi-fuel vehicles. One of the most important conclusions that the participants agreed upon is that these vehicles face a host of chicken-and-egg problems. With the notable exception of E85 cars, the cost of adoption of these vehicles is a clear example of these vicious cycles that plague the industry. For example, the battery in electric cars increases the cost of the vehicle between $10,000 and $30,000, and needs to be replaced over the course of the car’s life. While these costs will likely decrease once the manufacturer has reached a sufficient level of production and achieves economies of scale, how can we get to that point? As long as individuals have to shell out tens of thousands of dollars more for these vehicles, manufacturers are unlikely to ever reach economies of scale, leading to sustained high prices and low adoption.

Another barrier to adoption is the lack of refueling stations. On the one hand, no producer will invest up to a million dollars to install a station unless he believes there will be enough consumers demanding the fuel to produce a profit. On the other, individuals will not purchase these vehicles unless they believe they will be able to fuel them.

The government attempted to address the lack of refueling stations by providing a tax credit that would cover 30 to 50 percent of the installation price. Unfortunately, this policy was unable to break this cycle, though part of the problem was in the details. First, the tax credit’s limit was between $30,000 and $50,000: a mere fraction of the overall cost of installation. Second, the tax credit lasted for only three years, not giving the vehicle manufacturers sufficient time to adapt. Vehicle technology cycles last approximately seven years, and if a policy remains in place for only a portion of that time, it is unlikely there will be an adequate response from manufacturers.

Our inability to break through these barriers may be due, in part, to the current and past administrations’ practice of “choosing green winners,” or focusing policies around certain types of technologies or fuels. This has not helped us adopt alternative vehicles in a large scale fashion and may have blocked other, perhaps better, advanced technologies from emerging. For example, the billions of dollars that we spent on promoting domestic corn ethanol production and taxing ethanol imports effectively eliminated our ability to benefit from the more environmentally friendly (and cheaper) Brazilian sugar ethanol.

A couple of possible solutions to this dilemma emerged from the MITEI symposium. The first is investment in R&D: if the government can support manufacturers in their ability to advance technology, the underlying costs will decrease. This, in turn, will lower alternative vehicle prices and make them more accessible.

The second is time: as gasoline prices rise over the years, alternative vehicles will become more cost-competitive throughout their life cycle. This improvement in relative operating costs will promote more adoption, leading to a natural decrease in the costs of production. Although gasoline taxes would help to accelerate this process in a technology-neutral manner, such policies are commonly considered to be political suicide and, as such, are more of an economist’s aspiration than a feasible solution.

Ideally, government policies should focus on bringing down underlying costs or making the status quo more expensive. Spending billions of dollars promoting specific alternative technologies and fuels has proven to be unsuccessful and inefficient—let’s learn from that lesson.