A detailed evaluation of the real cost of operating a road vehicle in Europe has generated some astonishing numbers. If the full range of external costs of operating all forms of transport are factored in, the overall size of transport external costs is estimated at around 1000 billion euros a year–a figure much higher than previous estimates.
These numbers are the preliminary results of a study initiated by the European Commission in 2017 in an effort to establish the underlying facts and figures with a view to informing future policy debates. To put this in context, these costs correspond to almost 7% of EU28 GDP.
The external costs associated with all modes of transport include accidents, air pollution, climate change, fossil fuel production (i.e. well-to-tank emissions), noise, congestion, and loss of habitat. The pie chart shows the relative level of these costs for all modes of transport.
Accidents and road congestion account for more than half (56%) of the external costs associated with all modes of transport; climate change and air pollution for 28 percent.
If the numbers are broken out by mode of transport, we get the bar chart shown below (which doesn’t include congestion).
Travelling by car accounts for the majority of external costs associated with the transport sector: close to 370 billion euros a year. So with 296 million cars on European roads, the external cost of operating a a passenger car works out to be about 1250 euros a year for each vehicle.
By how much would these costs be reduced if people switched to electric vehicles? We can assume that the cost of accidents and habitat loss would stay about the same. But the external costs associated with air pollution, climate change, and well-to-tank emissions will all fall close to zero. Electric cars are also quieter than gasoline and diesel vehicles, but for the moment we’ll assume that there is not much change in this category.
Although the report from the European Commission doesn’t provide detailed costs, from the bar chart we can estimate that air pollution + climate + well-to-tank costs are about 100 billion euros a year. We don’t need great accuracy to arrive at some important implications for transport policy.
So replacing a gasoline or diesel vehicle with an electric vehicle (EV) would reduce the external costs associated with the use of a passenger vehicle by about 338 euros a year, which converts to about $380 USD or $510 Canadian.
Assuming that these external cost factors are about the same in Canada, over a 10-year period the external costs associated with driving a gasoline or diesel passenger car in Canada are in the region of $5100. So switching to an electric vehicle and taking a fossil-fuel powered car off the road reduces the external costs associated with the transport sector by approximately $5100 CAD.
Should EVs be subsidized?
The external costs of transportation are not paid by the user; they are paid by society as a whole. These costs are evidently significantly reduced if people switch to electric vehicles, and gasoline and diesel passenger cars are taken off the road. This implies that incentives that encourage the purchase of electric vehicles should also be coupled with disincentives to continue to use of older gasoline and diesel vehicles, whose second-hand purchase price may drop precipitously as the demand for this type of vehicle falls over the next decade.
One way to ensure that old fossil-fuel powered vehicles are soon scrapped is to impose a carbon tax on gasoline and diesel fuel. This suggests that incentives for electric vehicles need to be combined with a substantial tax on fossil fuels. This tax can of course be revenue neutral—the behavioural changes induced by the tax remain the same.
In this regard, the Canadian government’s plan to subsidize the purchase electric vehicles looks justified. The federal government will provide $300 million over three years to Transport Canada to introduce a new purchase incentive of up to $5000 for electric battery or hydrogen fuel cell vehicles with a manufacturer’s retail price of less than $45,000.
These data also support the government of Quebec’s policy of subsidizing the purchase of electric vehicles in that province.
Quebec’s policy of subsidizing electric vehicles has been strongly criticised by the Montreal Economic Institute (and echoed by Canada’s Ecofiscal Commission), which has stated that “subsidizing the purchase of such vehicles is the least efficient and most expensive way of reducing greenhouse gas (GHG) emissions.”
But reducing emissions of greenhouse gases is only one of several economic benefits that are produced by the switch to electric vehicles. Not only are emissions of carbon dioxide curtailed, urban air pollution is significantly reduced and this has immediate beneficial impacts on public health. Moreover, as the European Commission report notes, there are significant reductions in well-to-tank emissions. These will be predominantly methane, a greenhouse gas much more powerful than carbon dioxide.
On the other hand, if electricity is generated by fossil fuel power plants then the reduction in emissions caused by the switch to EVs will be offset by the increase in emissions from these power plants. So this is an additional consideration. If government policy is to be most effective, it must include EV incentives, a carbon tax, and a rapid shift to renewable sources of energy to generate electricity. Whether nuclear power should be in the mix is a matter of continuing debate. But recent analyses suggest that it is probably a mistake to phase them out before solar energy and wind power (always combined with energy efficiency improvements) are ready to take over and capable of handling peak elecctricity demand.
Notes: The report from the European Commission can be found here. The media release from the Montreal Economic Institute criticising Quebec’s EV subsidy is here. Canada’s 2019 budget which includes information on new EV subsidies is here. See also the Ecofiscal Commission’s report: 10 myths about carbon pricing in Canada, available here. The number of vehicles operating in Europe can be found in this report from the European Automobile Manufacturers Association.