The Dangers of EV Factory Subsidies

By Mikhail Vorobev @ Adobe Stock

Every Econ 101 student understands that subsidies create loss in the system by diverting productive resources into industries that wouldn’t otherwise get them. Now, states that created subsidies to lure EV manufacturing are learning that changes in consumer tastes can happen faster than government policies can keep up. Marc Joffe reports at the Cato Institute:

With electric vehicle (EV) sales growing more slowly than hoped, EV makers are reining in plans to build new car and battery factories. This is coming as a disappointment to North Carolina and other states that have offered lavish incentive packages to lure EV manufacturers to build and expand plants.

The first quarter of 2024 saw a surprising drop in EV sales and market share from the prior quarter. The decline, which cyclical factors can partially explain, appears to have been reversed in the second quarter. But EV sales growth has slowed from earlier in the 2020s, and it no longer seems inevitable (if it ever did) that EVs will quickly replace internal combustion engine vehicles on the nation’s roads.

Some EV makers are taking this market signal to scale bank investments in plant capacity. That can frustrate state and local government officials who offer subsidies and tax breaks to induce manufacturers to add capacity in their jurisdictions.

That’s the case in Chatham County, North Carolina, (west of Raleigh) where Vietnamese EV maker VinFast was supposed to build a giant facility that would start operating in July 2024. The state, county, and local entities offered VinFast an incentive package totaling $1.254 billion to build its new plant in the county.

But the plant did not open last month. Indeed, VinFast has pushed back the opening to 2028 and downsized the plant by 20 percent.

While the community awaits the deferred benefits of this facility, the state has already spent over $96 million of taxpayer money and condemned two businesses, as well as a church erected in 1888. Although the Fifth Amendment is supposed to limit the application of eminent domain to “public use,” the Supreme Court expanded the definition of “public use” to include private activities furthering a “public purpose” in its 2006 Kelo v. New London decision.

North Carolina is not the only state whose EV incentives are producing less-than-expected results. In Georgia, Rivian Automotive has suspended work on a plant that originally attracted $1.467 billion of incentives. Meanwhile, Ford has reduced the size of an EV battery plant in Marshall, Michigan, by almost half. The incentive package for the Marshall facility originally totaled $1.7 billion.

In a dynamic economy like ours, surprises are to be expected. The downsides (and upsides) of those surprises should belong to companies and their voluntary investors, not taxpayers forced to subsidize billion-dollar corporations by over-eager state and local governments searching for highly visible political wins.

Read more here.