Why Are Taxpayers Subsidizing Elon Musk's $100,000 Tesla?

Government subsidy included.

Photographer: Ron Antonelli/Bloomberg

Elon Musk, all-purpose impresario of the future, is enthusiastic about electric cars. “Eventually,” he says in the forthcoming issue of Bloomberg Markets magazine, “all cars will go electric.”

As the founder and head honcho of Tesla Motors, he would say that. But he has some evidence on his side. Electric cars are culturally modish. They're by most accounts fun and safe to drive. And their sales have been holding up lately, even as the price of oil has sunk and Tesla's stock has had a bumpy ride.

One problem: The success of electric cars generally -- and of Tesla in particular -- is due in no small part to a government mandate. And that mandate is distorting the auto market without clear evidence that it's going to achieve its stated purpose.

Tesla benefits from something called zero-emission credits. Pioneered in California and nine other states, the policy will impose fines on large automakers this year unless zero-emission vehicles account for at least 4 percent of their sales, rising to 15.4 percent for 2018 models. Companies that exceed the mandate get credits they can sell to their noncompliant competitors. For Tesla, each new sale brings multiple credits, adding up to a windfall for each Model S sold.

This policy is clever, well-intentioned and wrongheaded.

For one thing, it works at cross purposes with federal fuel-economy standards. Those standards require a manufacturer's entire fleet to exceed an average miles-per-gallon threshold. But when an automaker sells an electric vehicle, the government credits it against this overall average twice. Because of this double credit, the permissible fuel efficiency of the fleet is allowed to drop by a greater amount than what the fleet gains from an additional electric vehicle. So when California mandates that an automaker sell a zero-emission car, it effectively reduces the entire country's fuel efficiency.

And that mandate may not even make sense on its own terms. Whether electric cars contribute less to climate change than efficient gas-powered ones isn't as obvious as you might think. It depends on variables such as what time of day they're charged and the makeup of the local power grid. If much of the electricity used to charge them originates as coal, then their benefits quickly dissipate.

While electric cars should be a piece of the clean-energy puzzle, they shouldn't be favored at the expense of other technologies. Because electrics are, at present, essentially the only practical way to get to zero emissions, California is prodding automakers to bet on an extremely expensive and possibly inefficient method of reducing greenhouse gases. And it's penalizing the buyers of nonelectric vehicles -- who ultimately bear the costs when automakers have to buy credits from Tesla -- to subsidize someone else's purchase of a $100,000 car.

A better way to reduce emissions is to continue tightening federal fuel-efficiency standards and to reduce their perverse bias in favor of larger vehicles. Better still would be a carbon tax, which would give customers an incentive to buy more efficient cars and harness the market to encourage innovation. That's more politically feasible than you may think, and the consensus choice among economists for fighting climate change.

As appealing as a new Tesla is -- and with apologies to Elon Musk -- it's not going to save the world by itself. Governments should stop pretending it will.

(Corrects number of states and removes reference to the size of the windfall in the fourth paragraph of editorial published Feb. 17.)

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.