The stated goal of the new Clean Cars policy is to “make electric, hybrid and fuel efficient vehicles more affordable so New Zealand families can choose a vehicle that’s better for the climate and their back pocket”. Is this what will happen?

The policy is two part, media focus is mostly on the feebate portion of the policy, the Clean Car Discount, but in all probability, the only effective part of this new policy may be the Clean Car Standard emissions targets which are to be introduced from 2021. 

With transport making up 20 percent of national greenhouse gas emissions, and light vehicles responsible for 70 percent of that, there have long been calls for government intervention to promote uptake of more efficient and low emission vehicles. 

Transport is New Zealand’s fastest growing source of emissions, increasing 82 percent over the period 1990- 2017.

The Clean Car discount proposes to influence consumer demand by offering a subsidy on low-emissions vehicles of 3.5 tonnes gross vehicle mass or less, excluding motorcycles, military vehicles and farm tractors. Note that these may still be petrol powered, this is not exclusively an electric vehicle subsidy. In fact it is bad news for existing owners of electric vehicles as this policy will replace the current exemption from Road User Charges.

Note that the proposed influence point for the government is to shift demand towards low emissions vehicles, this policy will not reduce the numbers of cars on New Zealand roads.

What do people think of this idea?

Those who insist on driving a guzzler will still be able to buy one, but with an increase in price of up to $3000. The theory is that these fees will cover the cost of the subsidies making the policy revenue neutral. This is important from a political stand point as the Labour led government have promised not to introduce any new taxes, but it’s a bit of a technical distinction.

Criticism has come from School Strike 4 Climate, as they would like to see the policy applied to all sales including the domestic second hand market. Apart from the issue of administering such a proposal, this is nonsensical as a second hand buyer must choose from the available market. Additionally a subsidy at this point would make efficient cars more popular, and the less efficient cars would then become cheaper as a result. Any discount in the new or import price will have a flow on effect into the second hand market to some extent.

Who gets the subsidy?

Regardless if the discount is applied at the point of sale, or provided directly to the consumer in a cash back style scheme, these types of subsidies can have unintended consequences. 

The policy includes a requirement that vehicle suppliers would be required to display the specific fees and discounts that apply to vehicles available for sale. However, this doesn’t prevent the dealer from increasing the price by the same amount as the subsidy. 

Let’s say a car cost $10,000 today, and next week is subsidised by $5,000. The sign on the car can simply say price: $15,000, subsidy $5,000, cost to you $10,000! No rules are broken as the dealer is free to price the car how they wish, and the consumer has all the information. 

Having charged the $15,000, the dealer’s profit is increased by the $5,000 difference.

Free market proponents will claim that competition will prevent this from happening. It remains to be seen if there is sufficient competition in the car market to prevent industry capture, or if the more profitable approach will be widely adopted. In practice the truth is somewhere in the middle, with a larger profit margin comes increased flexibility in pricing, dealer will attempt to raise prices, and competitive forces will prevent them from being able to raise them by the full amount of the subsidy. Under this scenario prices are still higher (and dealing cars more profitable) than before the subsidy was introduced. 

If true competition exists, there might be  an alternative perverse outcome. A reduction in the cost of efficient cars will lead to a price drop for thirsty cars, as they will have to be cheaper to compete. This could lead to fewer such cars being imported (a key policy aim), but remember that 70 percent of car sales are second or subsequent sales of cars which are already in use. Those buying the currently fashionable 4WD utes are already in the higher price brackets, so the effect may not be significant in that context anyway.

What is the consumer’s rational response?

The new policy is out for consultation, so none of these settings are finalised but it is unlikely the policy will be substantively different from the discussion document. What then is the rational response of anyone looking to buy a car? It depends how you think the policy will play out in market, but you would excused for thinking it makes sense to buy a gas guzzler now, avoid the $3,000 fee, and delay your electric car purchase until after 2021. Is that what the policy intended?