Bloomberg View: Incentives for Car Buyers, Not Carmakers

Expand credits for electric cars
Illustration by Bloomberg View

Much has been made of the U.S. government’s botched $535 million in loan guarantees to Solyndra, the California solar-panel maker whose business imploded, leaving taxpayers burned. Less known is that the government, in its quest to spur investment in environmentally friendly vehicles, has been handing out essentially free money to well-known companies that don’t seem to need cheap credit.

Since 2009 the Federal Financing Bank, the U.S. Treasury Department bank that funded Solyndra, has been providing loans with rates hovering near 1 percent to Nissan Motor, Ford Motor, and other companies to develop electric cars and other fuel-efficient vehicles. These loans, guaranteed by the U.S. Department of Energy, carry low interest because the Federal Financing Bank bases its rates on Treasury’s borrowing costs. In May, Ford drew down more than $148 million from a guaranteed loan with a 1.3 percent interest rate.

To date, the Advanced Technology Vehicle Manufacturing program has made loans to five companies, including $5.9 billion to Ford to upgrade auto plants across the U.S. and $1.4 billion to Nissan to retool a Tennessee plant. Fisker Automotive—which makes a luxury plug-in car that costs $103,000—got $529 million, and Tesla Motors got $465 million to build plug-in vehicles and components. An additional $50 million is going to the Vehicle Production Group to make a natural-gas-powered, wheelchair-accessible van. Energy officials say the administration continues to review additional projects. So far more than $8.4 billion has been lent.

The theory behind the program is that cheap, risk-free loans will encourage auto companies to invest in clean-energy technology. A better use of government money would be to encourage consumer demand—by continuing, and expanding, tax credits for people who buy vehicles that use little or no gas.

The U.S. is already prodding companies to develop energy-efficient vehicles in other ways: President Barack Obama’s fuel-efficiency standards will require cars to get 54.5 miles per gallon by 2025. Analysts say only so much of that gain can come from improving gas-powered cars—the rest will have to come from using flexible fuels or electric models. The U.S. tax code also offers incentives to purchase energy-efficient cars, including a $7,500 credit for some hybrids and plug-ins.

The government should use its limited budget to extend and expand these credits, or to provide refunds to people who buy greener cars—much as the Cash for Clunkers program did to spark sales of more fuel-efficient cars.

If there’s any lesson from the 2008-09 auto bailouts, it’s that car companies should make the cars people actually want to buy. Dangling carrots in front of those buyers to urge them toward greater fuel efficiency is something the government can usefully do.

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