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The simplified economics of electric cars

Summary:
The era of zero real interest rates (for savers) makes all sorts of calculations simpler. I started looking at the choice between electric vehicles (EVs) and comparable cars with internal combustion engines (ICE) and ran into a bunch of issues about depreciation, time horizons, resale values and so on. But there’s one way of making the comparison very simple. Consider someone who buys a car for cash and drives it until its value reaches zero and it is scrapped. (For the moment, don’t worry about the fact that not many people do this.) Further, assume that the best alternative is to save the money, at zero real interest, for example by buying long term bonds. The final simplification is to assume that both cars travel the same distance in their lifetimes before being scrapped.

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The era of zero real interest rates (for savers) makes all sorts of calculations simpler. I started looking at the choice between electric vehicles (EVs) and comparable cars with internal combustion engines (ICE) and ran into a bunch of issues about depreciation, time horizons, resale values and so on.

But there’s one way of making the comparison very simple. Consider someone who buys a car for cash and drives it until its value reaches zero and it is scrapped. (For the moment, don’t worry about the fact that not many people do this.) Further, assume that the best alternative is to save the money, at zero real interest, for example by buying long term bonds.

The final simplification is to assume that both cars travel the same distance in their lifetimes before being scrapped. That seems reasonable. Most estimates suggest that the battery in an EV can last for at least 150000km, and an ICE car that has been driven that far is worth a few thousand dollars at the most (I should know!). At a stretch, we could say 200000km for both.

In this case, we can simply compare the difference in purchase price with the lifetime savings in running costs. A standard estimate is that the fuel and maintenance costs of an EV are about 15c/km less than those of a comparable ICE (10c/km for fuel and 5c/km for maintenance). So, the lifetime savings come to between $22500 and $30000 for the EV. That seems comparable to price differences observed in the market.

Now for some potential complications

First, most new car buyers don’t keep them until they are scrapped. As far as the total comparison is concerned, this doesn’t matter much. If the car is sold partway through its life, both the total cost and the operating savings are shared between the buyer and the seller. But if the initial depreciation is more rapid than is justified by the reduction in service flows, the buyer will get more of any net benefit, and the seller less. In particular, this will happen if the price of EVs is falling, as is happening more

Second, for people who borrow to buy their cars, at positive real interest rates, the difference in purchase price is more significant, and the case for buying an EV correspondingly weaker. As general car buying advice, if you can it’s much better to add to your mortgage than to take a car loan. But you need to increase your repayments by more than the minimum required – ideally by the amount you would have paid on the car loan.

Third, this excludes any consideration of a carbon price. A price of $50/tonne would add about 12c/litre to the cost of petrol, or about 1.2c/km for a car using 10l/100km. The cost for the EV would depend on the carbon intensity of electricity generation.

Finally, there are incentives (such as tax exemption) and disincentives (such as the electric car road tax imposed by the victorian government). These need to be taken into account, but will differ from place to place and time to time.

John Quiggin
He is an Australian economist, a Professor and an Australian Research Council Laureate Fellow at the University of Queensland, and a former member of the Board of the Climate Change Authority of the Australian Government.

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