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Elon Musk Has It All Wrong on Subsidies

Elon Musk Has It All Wrong on Subsidies

Sunday, 12 December, 2021 - 05:45

Elon Musk doesn’t want subsidies. “Just delete them all,” he said Monday at the Wall Street Journal’s CEO Council Summit, referring to state backing for the electric vehicle market. But that doesn’t mean that Tesla Inc. hasn’t benefited from incentives, or that other companies have no need for them — they do.

This is the second time Musk has come out swinging against government help in recent months. A few weeks ago, the company withdrew its application for state aid for a planned battery factory in Germany, where it was expected to get over 1 billion euros ($1.2 billion) in support. “It has always been Tesla’s view that all subsidies should be eliminated,” he posted on Twitter.

It’s unclear what his exact rationale is, especially because Tesla — now valued at close to $1 trillion — is no stranger to preferential treatment from the state, including the US and China.

Musk’s company is built on the foundation of (mostly) good ideas that have been backed by public largesse. Government incentives have boosted sales in locations from Denmark to Hong Kong, while manufacturing operations in China have gone relatively smoothly thanks to state aid. In Europe, Tesla was looking to tap subsidies to get set up in Germany. For new markets, such as India, the firm is actively looking for an entry with exemptions. Few other automakers have been able to use global subsidies as effectively.

In the US, aid came in various forms, including loans, credits and tax breaks. In 2010, the firm got a $465 million loan from the Energy Department under a special program, which it repaid three year later. The state of Nevada gave the company $1.3 billion in incentives to build a battery factory near Reno. Other states have given Musk millions of dollars, too. Tax credits for consumers, meanwhile, helped make Teslas more affordable, until the company sold enough vehicles to render it ineligible for aid. Under Biden’s “Build Back Better” spending bill, the automaker could re-qualify because the cap on cars sold will be removed. Tesla continues to benefit from pollution credits that it can sell to other manufacturers, too.

When the US market was rocky, though, Musk looked to China – a growing consumer base with supportive policies, where he was welcomed with open arms. Tesla has benefited from loans on loose terms, low-cost land, an investment agreement with the government, support for the speedy build-out of its manufacturing facility, a deep supply chain of suppliers, including for batteries — you name it. All that has allowed the company to churn out thousands of vehicles for sale in the world’s largest market and now exports them to other parts of the world.

With its market heft and record sales in some places, it’s easy for Musk to brush off the hand-holding. At the WSJ summit, when asked whether state support for charging networks is needed, Musk replied, “Unnecessary — do we need support for gas stations?”

But here’s the thing: History shows that electric vehicles got left behind internal-combustion-engine vehicles because of insufficient investment in electricity grids and infrastructure, such as charging facilities. In fact, one study has shown that when performance was taken into account, EVs were cheaper or on par with gasoline-driven cars. The “most important factor in settling the race between gasoline and electric vehicles,” it found, was that “a 15–20 year earlier diffusion of electricity would have tipped the balance” in favor of EVs.

Even today, that cost barrier remains. By some estimates, it’s close to $6 trillion, around half of which is money that needs to be spent on electricity grids. The industry is capital intensive, as Musk knows well. The only way to cross the hurdle before uptake rises exponentially is public aid. Sure, there’s a case for better policy design, more focused subsidies, and ways to drive more investment by companies alongside government aid. Without this, the EV market won't take off. Private investment alone, or a laissez-faire approach, isn’t an option.

Perhaps Musk can test out his theory by sharing some of the generosity he’s enjoyed, or better yet, refusing all the preferential treatment he gets around the world. His troubles in Germany may be an early taste of what could happen. Then we’ll see where shares and sales end up, and how far policy support can go.


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