Economic Implications of a Phased-in EV Mandate in Canada

Like many jurisdictions, Canada has set a target of 2035 to eliminate sales of internal combustion engine vehicles (ICEVs) in favour of electric vehicles (EVs), for the purpose of reducing greenhouse gases. Past literature has focused on the engineering and economic aspects of integrating EVs into the passenger transportation system. Herein I examine the implications for the ICEV market of a phased-in EV mandate. I show using partial equilibrium analysis that, during the interval when both types of cars are available, auto companies will overproduce EVs and earn scarcity rents on ICEVs that partially offset the revenue loss from the mandate. I then present a numerical general equilibrium model of the Canadian economy to assess the macroeconomic consequences of banning ICEVs. The results depend critically on the pace at which EVs achieve cost parity with ICEVs on a quality-adjusted basis. An EV mandate will have temporary but manageable economic consequences if technology improves so rapidly that the mandate is effectively unnecessary. But if the mandate outpaces achievement of cost parity the economic consequences will be quite severe and make it unlikely the policy could be maintained. For example it would likely cause the auto manufacturing sector to shut down. The analysis also provides insight into why automakers have been so willing up to now to develop EV product lines even though they have long lost money on them and expect to continue doing so.