Economic implications of a phased-in EV mandate in Canada

Abstract

Canada plans to phase out internal combustion engine vehicle (ICEV) sales in favour of electric vehicles (EVs) by 2035 as part of its climate policy. Herein I examine the economic implications of a phased-in electric vehicle mandate. I show using partial equilibrium analysis that when both types of cars are available, auto companies will overproduce electric vehicles and earn scarcity rents on internal combustion engine vehicles that partially offset the revenue loss on electric vehicles. I then present a numerical general equilibrium model of the Canadian economy to assess the overall macroeconomic consequences of the policy. The results depend critically on the assumed pace at which electric vehicles achieve cost parity with internal combustion engine vehicles on a quality-adjusted basis. An electric vehicle mandate will have manageable economic consequences if technology improves so rapidly that the mandate is unnecessary. If the mandate outpaces achievement of cost parity the economic consequences can be severe and would likely cause the auto manufacturing sector to shut down. The cost per tonne of emission reductions are at least 10 times the Canadian carbon tax rate while the mandate is binding. The analysis provides insight into why automakers have been willing hitherto to develop and sell electric vehicles even though they currently lose money on them.