Renewable subsidies for EVs a risk: IMF

The IMF has revealed how similar policies have already damaged China's economy.

BYD electric cars for export waiting to be loaded onto a ship at a port in Yantai, in China's Shandong province. Sales of electric and hybrid vehicles jumped more than 40 per cent in China in 2024. The IMF has warned governments to reconsider the subsidies path to encouraging non-fossil-fuel takeup. Picture: supplied

Government subsidies that target the energy sector, including electric vehicles, pose a “significant risk” of lowering productivity, increasing consumer prices, cutting GDP and becoming costly for budgets, the International Monetary Fund has warned Western countries including Australia.

The Albanese government has committed $22bn in subsidies over the next decade within its Future Made in Australia plan, which the Productivity Commission has already criticised and recommended a phasing-out of direct subsidies in renewable energy after 2030.

“The risks that industrial policy may not deliver economic gains are significant,” the IMF said in an early release of a chapter of its World Economic Outlook.

“While industrial policy can raise production in the targeted sector, this needs to be balanced against other considerations such as fiscal cost, higher consumer prices and possible resource misallocation.”

People try Tesla's electric vehicle Model 3 at its booth during the China International Supply Chain Expo in Beijing in 2023. Picture: AFP

The IMF’s warning that “wasteful spending” risked drawing resources away from more productive sectors, reducing efficiency as well as pushing up consumer prices, comes as energy billionaire Trevor St Baker on Friday criticised the government’s emissions standards, saying they would not be necessary for the take-up of EVs.

“All electric battery EVs have one-sixth the fuel cost of internal combustion engines and this will pave the way for EV uptake rather than government emissions standards,” Mr St Baker said.

The government’s New Vehicle Efficiency Standards include credits to manufacturers for supplying EVs, but they also come with penalties for any emissions, which Honda said this week would kick in for hybrids by next year and push up the cost for consumers.

Mr St Baker said the government’s settings were wrong.

“Honda, like every private enterprise in the energy sector, is affected by these totally incompetent government energy and emissions reduction policies,” he said.

After Honda’s warning of higher prices, Toyota said on Friday that “prices could go up” under the NVES.

The Climate Change Authority released its plan last month outlining an aggressive shift towards Battery Electric Vehicles, suggesting 50 per cent of all light vehicles sold between now and 2035 must be BEV to meet the emissions target.

The Federal Chamber of Automotive Industries on Friday released car sales numbers showing BEVs from all sources made up around 11.3 per cent of all new vehicle sales for the September, lifting their year-to-date share to 8.1 per cent. Plug-in hybrids’ year-to-date share was 4.2 per cent.

Mr St Baker said the transformation to BEVs was “essential for achieving even 70-80 per cent reduction in emissions”.

“However, there is a total lack of any credibility of federal government claims of being able to achieve 100 per cent reduction in CO2 emissions without use of all low-emission fuels, especially including 20 per cent nuclear power generation to provide the energy to electrify everything at lowest cost,” Mr St Baker said.

A fast-charger station for electric vehicles at Frenchs Forest in northern Sydney. Picture: Jim O’Rourke

The IMF’s report noted that renewable energy subsidies and reduced sources of fossil fuel energy may be counter-productive to some parts of an economy.

“Broad-based energy sector subsidies could lessen reliance on fossil fuel imports while reducing productivity in non-energy sectors,” it said.

“Cross-sectoral spillovers can be negative, undermining aggregate productivity even as targeted sectors expand.”

It said that negative cross-sector spillovers were created by “drawing away resources from sectors that are not targeted”.

“If those sectors are highly productive, or exhibit economies of scale, then aggregate productivity could fall.”

Mini electric vehicles decorated with various images in Liuzhou, in southern China's Guangxi province. Tiny electric cars weave through traffic in southern China. Picture: AFP

The report gave key examples including renewable energy subsidies in the European Union.

“Even when well targeted, interventions can be fiscally costly. For instance, a clean technology subsidy in the EU sufficient to onshore a significant share of production could cost about 0.4 per cent of annual GDP, close to half of the EU budget.

“Poorly targeted policies risk wasting scarce fiscal resources without delivering meaningful returns.”

A worker checks a vehicle frame on the production line for electric vehicle maker Zeekr at its factory in Ningbo, China. Zeekr is among several Chinese EV makers building vehicles in automated factories using robotics powered by artificial intelligence alongside human workers. Zeekr is owned by Geely Holdings, which also has ownership stake in a number of foreign brands including Volvo, Lotus, and Polestar. Picture: by Kevin Frayer/Getty Images

The report also slammed China’s efforts on subsidies to the electric vehicle sector, with IMF experts Daniel Garcia-Macia and Siddharth Kothari estimating that such subsidies reduced the country’s productivity by 1.2pc and lowered GDP by 2 per cent.

“Despite the success in some technologies, industrial policy appears to have lowered overall productivity by distorting the allocation of production factors across firms and sectors.

“Factor misallocation induced by industrial policies is found to have reduced China’s aggregate total factor productivity by 1.2 per cent and its GDP by as much as 2 per cent.”