Quick, think back to econ 101. How can you deal with negative extranalitites? Quotas and pigovian taxes (gas guzzler tax’s for example), right? Sure, those might work, but they aren’t exactly the best option for dealing with the auto industry. What else might work? If you are thinking about tradable tax credits, then you and the state of California are thinking along the same lines.
“The ZEV Regulation requires large volume and intermediate volume vehicle manufacturers to bring to and operate in California a certain percent of ZEVs (such as battery electric and fuel cell vehicles), clean plug-in hybrids, clean hybrids and clean gasoline vehicles with near-zero tail pipe emissions.”
Tesla, a company that has been all over news headlines recently, is about to take advantage of those tradable credits to the tune of $250 million dollars, in what may be its first profitable quarter. Companies who do not meet California’s ZEV standards can buy credits from companies who produce over their respective ZEV expectations. Because Tesla only produces zero emissions vehicles (The model S and soon to come model X) it receives approximately $35,000 in tax credits for each Model S sold.
This market for tradable credits is a perfect example of forcing those producing the negative externality to internalize their costs. Thilo Koslowski, an analyst for Gartner Inc. was quoted as saying, “At the end of the day, other carmakers are subsidizing Tesla.” Although on the surface, this may be true, the goal of the state of California is to force those producing the negative extranalitites (the car makers who are “subsidizing Tesla.”) to internalize costs that would otherwise be passed on to everyone else.
Personally, I feel this is a great policy. It’s a way to make electric vehicles cost effective without funneling taxpayer money into them to lower their costs. Obviously, those who do not produce ZEV vehicles see the policy as unfair to them but it will accomplish one of two things. Either, automakers will begin producing ZEV vehicles to avoid paying the credits (which is good in terms of pollution externalities) or, they will continue to subsidize companies like Tesla (whose vehicles are good in terms of pollution externalities.