The Economics of Electric Vehicles for Passenger Transportation

As noted, the transition to E-Mobility has major financial implications. The overall investment requirements are significant and spread across sectors and actors.

For private individuals, there are affordability issues and potential financing needs. Regarding the public sector, the transition to electric mobility may reduce fiscal revenues, given the nature of existing distortions in energy pricing.

This situation makes it much less likely that the shift could be partially self-financing through government revenue streams. A final possibility is the use of carbon finance, which depends on the implicit carbon price associated with the uptake of electric vehicles, as well as the share of investment that can potentially be covered by carbon credits. Each of these aspects is explored in the following section, using repurposed data and drawing on calculations made for cost-benefit analyses.

Assessing investment needs

Behind the economic results, there is a significant volume of investment that needs to be made by different actors. Firstly, both private and public vehicle owners will face additional capital costs associated with vehicle purchases. In addition, a significant expansion of public infrastructure will be required to support the expanded electric vehicle fleet, in particular charging stations. Although there are also implications for investment in the electricity sector, given that the simulated 30×30 scenario (30 per cent of new vehicles to be electric by 2030) implies only a tiny increase in electricity demand of well below one percentage point, these are not considered here and would in any case be fully financed through the payment of the electricity tariff.

Click to expand. Implicit carbon price at 2030, 30×30 Scenario. World Bank Data (2023)

Assessing fiscal implications

Given the significant demands that electric mobility may place on public investment, it is important to consider the fiscal implications of its introduction. One question is whether increased penetration of electric mobility will lead to better or worse public finances, and whether this will help or hinder the financing of the associated costs. Given the extensive network of taxes and subsidies on liquid fuels and electricity, the acceleration of electric mobility is likely to have fiscal implications. Specifically, this study finds that countries are overall more likely to tax petroleum and diesel and subsidize electricity. Wherever this is the case, a shift towards electric mobility could have a negative impact on the government’s net fiscal position by reducing tax revenues from liquid fuels, while attracting additional subsidies to the electricity sector. In addition, the extent to which the vehicle tax system favors electric vehicles will lead to reduced fiscal revenues as the uptake of electric vehicles accelerates.

Assessing affordability

Regarding the incremental capital cost of vehicles to households, it is pertinent to ask whether this is likely to be affordable, given the relatively modest budgets in low- and middle-income countries. While four-wheelers are likely to be purchased primarily by the wealthiest households, two-wheelers are more likely to be purchased by poorer families and small and medium enterprises engaged in transport activities.

Assessing prospects for carbon finance

Given the significant investments associated with electric mobility and the reduction of carbon emissions, it is interesting to explore whether some of these capital costs could be covered by carbon finance. To assess this possibility, it is necessary to calculate the implicit carbon price associated with electric mobility, to see how it compares to market prices, and to explore what percentage of the associated investments could potentially be covered by carbon credits. The implicit carbon price is calculated as the economic cost difference between the 30×30 scenario in 2030 divided by the lifetime carbon savings of the additional electric vehicles entering the fleet in that year.

Conclusion

In summary, the main findings of this analysis are that, first, there are significant capital cost differentials for electric vehicles across all vehicle categories. Although these cost differentials are decreasing over time, they still present a significant affordability challenge and may prompt some consideration of consumer financing policies. The differentials are still quite prohibitive for cars, and less so for two-wheeled vehicles.

Second, in about one-third of the countries studied, the lower operating costs of EVs over the lifetime of the vehicles more than justify the additional capital costs in economic terms. EVs are cheaper to maintain and consume a fraction of the energy of ICEs due to greater energy efficiency. This energy efficiency effect overwhelms the fact that electricity is a significantly more expensive energy source in economic terms on a normalized basis per unit of energy.

References

• World Bank Data (2023) The Economics of Electric Vehicles for Passenger Transportation Retrieved from: Link