By Greg Ip

Skepticism of electric cars melts a bit more with each new announcement from the likes of Tesla, which last week launched production of a mass-market vehicle, and Volvo, which days later promised to phase out gasoline-only engines by 2019.

But that progress comes with two big caveats: First, it has relied on extensive public subsidies and, second, it has done little to reduce planet-warming emissions of carbon dioxide. If electric cars are ever to displace gasoline engines without government putting its thumb on the scale, they must not only keep innovating but outrun fossil fuels where productivity also keeps advancing.

Electric cars have come a long way. They are no longer ugly, impossibly expensive and impractical, thanks to technological advances that have slashed battery storage from $1,000 per kilowatt-hour in 2010 to $273 per kwh last year, according to Bloomberg New Energy Finance…

…Many optimists think falling battery costs mean electric vehicles (EVs) will inevitably displace the internal combustion engine (ICE). Last week, Bloomberg predicted electric cars would become “price competitive” with ICE cars in eight years without subsidies.

But such scenarios hinge not just on the cost of batteries but on the price of oil and the efficiency of competing vehicles. Economists Thomas Covert, Michael Greenstone and Christopher Knittel, in an article for the Journal of Economic Perspectives, estimate that at the current battery cost of $270 per kwh, oil would have to cost more than $300 a barrel​ (in 2020 dollars) to make electric and gasoline equally attractive. If battery costs fall to $100, as Tesla Founder Elon Musk has targeted, oil would have to average $90…

…Federal regulators further dilute the carbon-reduction impact by giving manufacturers added credit for each electric vehicle, when complying with average fuel efficiency standards. Thus, every electric vehicle sold allows a manufacturer to sell a few more gas guzzlers and still comply.

These subsidies have clearly accomplished one goal: They’ve accelerated electric vehicle technology innovation when the private market had little incentive to invest. Yet they may not be the most efficient way to combat carbon emissions. A carbon tax, for example, would incentivize conservation and alternative fuels regardless of oil prices.

Since that’s unlikely for now, Mr. Greenstone and Sam Ori, both of the University of Chicago’s Energy Policy Institute, and Cass Sunstein, of Harvard University, suggest scrapping the current array of fuel efficiency standards and assigning manufacturers a tradable emissions cap for each vehicle. This would put alternatives to electric cars, such as more efficient gasoline or diesel engines, on a level playing field. Just in case electric vehicles don’t meet their heady expectations, the world should spread its bets.

Continue reading at The Wall Street Journal…

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Areas of Focus: Energy Markets
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Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Electric Power
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Electric Power
As the electric power system faces new pressures and opportunities, EPIC research is working to identify the mix of policies needed to accelerate the global transition to clean, reliable, affordable...
Transportation
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Transportation
Mobility is central to economic activity. Yet, a lack of fuel diversity and continued demand growth have made the transportation industry a major contributor to global pollution and carbon emissions....
Climate Change
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Climate Change
Climate change is an urgent global challenge. EPIC research is helping to assess its impacts, quantify its costs, and identify an efficient set of policies to reduce emissions and adapt...
Climate Economics
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Climate Economics
Climate change will affect every sector of the economy, both locally and globally. EPIC research is quantifying these effects to help guide policymakers, businesses, and individuals working to mitigate and...