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Why The Switch To Alternative Energy Vehicles Hasn’t Happened Sooner
ONC Editorial

Sep 05, 2023

The market and government failure currently faced by the alternative energy industry must be addressed. (The opinions expressed in this piece are those of the individual author, Alexander Sejas, whose information can be found below.)

According to a 2021 report from the U.S. Environmental Protection Agency, traditional automobile emissions are one of the primary sources of air pollution. In fact, the U.S. transportation sector accounts for 29% of the nation's greenhouse gases. Ninety-one percent of the energy consumed in the sector comes from petroleum, with electricity providing less than 1% of total transportation sector energy.

Governments have begun to develop the renewable energy industry, especially the alternative energy vehicle industry, in an effort to actively combat environmental concerns. However, consumers, producers and policymakers alike have not been able to keep up and make the switch to AEVs due to numerous market and government failures.

Consumers of alternative energy vehicles will bear the risk of immature technology, uneconomical purchase and inconvenient use. Automobile manufacturers face huge research and development investments and greater technical risks in large-scale production; areas such as the basic research on core components (e.g. batteries) related to new energy vehicles are not yet mature.

The alternative energy vehicle market is also not as competitive as traditional fuel vehicles. Automobile manufacturing companies often run "high-risk, low-return" investments in the AEV market. The relevant producers and consumers bear a considerable cost, and the benefits (environmental protection and energy conservation) are shared by society. Thus, it is challenging to promote the initial stages of development in the AEV industry by solely relying on market mechanisms.

Alternative energy vehicles are a new industry, which gives rise to a "system failure" along with common market failures. When the institutions of the innovation system cannot achieve practical cooperation, there will be a system failure, which is mainly reflected in the lack of collaboration among automakers. 

The construction of public and private charging stations requires the cooperation of automobile companies, power grid companies, property companies and real estate development enterprises. The introduction of AEV policies requires the collaboration and mutual support of transportation departments, science and technology departments, financial departments, tax departments and other government entities. 

The main reason for the market failures is that enterprises face the challenge of market competition because of the increase in product costs caused by investment in the industry. How to urge enterprises to voluntarily produce alternative energy vehicles and reduce their negative external impact on the environment is a common problem faced by the government and society. One option is to internalize the environmental cost by letting the enterprise bear the investment cost of environmental protection, and eliminate the ecological cost caused by the environmental pollution by passing costs to the public and government.

To eliminate the "market failure" in the market-oriented development of the AEV industry, the government must act as the "rational man" and intervene. Given the implementation of the policy regarding the AEV industry, it is essential to analyze the economic feasibility of eliminating the effectiveness of the two failures combined with the market-oriented mechanism of new energy vehicles. 

To make AEVs equally competitive with traditional vehicles, the government needs to implement regulatory policies on non-environmentally friendly products such as taxes and fines. On the other hand, it is necessary to incentivize environmentally friendly products via tax reductions or subsidies, so enterprises voluntarily produce and reduce their impact on the environment. 

To encourage enterprises to produce AFVs, the government must adopt an incentive-based monetary policy to reduce their marginal costs. With the gradual promotion of the marketization of alternative energy vehicles, the policy effect will gradually appear, the public will gradually accept new energy vehicle products, the sales volume will increase through market penetration and commercial risk will be reduced.

When the increase in sales income reaches a particular point, the investment will be recovered until the break-even point. When the government's incentive policy withdraws and the AEV investment project transitions to the growth stage, its economic feasibility will be realized.

The market and government failure currently faced by the industry must be addressed. The government can implement high-value (and long-duration) financial incentives, which are simple to implement but come at a high (direct) cost to the government.

Alternatively, they can turn to a zero-emission mandate, which provides the highest certainty of a robust transformational signal at little (direct) cost to the government, though it is more complex to administer. Regardless, it is imperative that the government take steps to actualize the switch to alternative energy vehicles.

To see all sources consulter and/or to learn more about the author, Alexander Sejas, click HERE

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