Outside of Reno, a fleet of 50 earthmovers was spotted in July, flattening desert hills and clearing out brush. It was an early hint that Tesla would build its $5 billion battery factory in Nevada, as opposed to the other Southwest states courting the electric car maker.
About $1.25 billion in subsidies from the state government convinced Tesla's owner Elon Musk to settle in the Silver State.
Nevada taxpayers may not be pleased about footing a quarter of the tab for this billionaire’s for-profit business. But the cost to Nevada taxpayers will not be as painful as the distortions to the market. By picking Tesla’s lithium-ion batteries as the big winner, Nevada tilts the playing field, thus creating new economic inefficiencies and possibly retarding the development of clean energy and transportation.
The subsidies are big, of course. “Tesla will operate in the state essentially tax-free for 10 years,” the Reno Gazette-Journal reported. Sales tax, property tax, business taxes — all waived for 10 or 20 years, just for Tesla. The state will give Tesla $195 million in tax credits that the company can in turn sell to other companies. So this is basically a $195 million cash transfer from Nevada taxpayers to a company owned by a billionaire.
The total price tag is about $1.25 billion over 20 years — mostly front-loaded. But even if Tesla's factory does well, and taxpayers and Nevadans break even in the long run, there are still high costs to the Silver State’s rash bet on Musk’s batteries: the economic distortions.
Scarcity is a central fact of economics. People, money, materials and time are scarce. Resources that go to one company or technology can’t go to another. And increased demand means higher prices for everyone — when Company A starts buying more iron, Company B will end up having to pay more for iron.
In the case of Tesla’s battery factory, the scarcity of land isn’t an issue: this was barren desert wasteland before Musk’s bulldozers cleared room for the factory. And in the short term, labor isn’t scarce, either. But scarcity does exist in both battery materials and the attention of potential suppliers and partners. In these regards, Tesla’s growth drags resources away from other uses.
It’s not a given that lithium-ion batteries are the best batteries for electric cars, or for electrical grid storage. Other types of batteries today show promise, most of which you’ve never heard of: vanadium redox flow, zinc-based, sodium-aqueous and liquid-metal.
Businesses looking to invest in batteries are deciding between these technologies and more. Market players will weigh the different technologies’ cost of manufacture, durability, usefulness.
Nevada, by boosting Tesla, has just tilted the scale. Greentech Media explains: “Tesla’s plans are already influencing expectations in the grid storage world. AES Energy Storage President Chris Shelton told me that the Giga factory has played an important role in the company’s decision to concentrate on lithium-ion as the battery chemistry of choice for the next seven to ten years.”
Maybe Nevada chose wisely. But maybe more promising technologies will see less investment because players like AES are chasing Tesla, which is powered by Nevada’s corporate welfare.
Turbocharging Tesla’s battery factory also accelerates demand for raw materials — lithium and graphite. This is great news if you own a lithium or graphite mine (you probably don’t unless you’re in China). But what if you are a user of lithium or graphite? Then Tesla’s battery bonanza increases your costs, and Nevada’s subsidies exacerbate your problems.
A major material in a lithium-ion battery is graphite. The steel industry relies on graphite for making refractories — material that can withstand very high heat. Tesla is now applying slight upward pressure to the cost of making steel, and thus the cost of everything that uses steel.
The market is full of different industries bidding over scarce resources. Who gets them? Normally, it's the industry to which the resource is most valuable. But by subsidizing one particular use of lithium and graphite, Nevada is skewing price signals.
Other potential losers: Technologies that could compete with battery-powered cars. Natural gas cars, better rail, better telecommuting and so on. The market could have picked a winner — or some combination of winners. Instead, the politicians in Carson City did the picking.
If your goal is maximized economic efficiency, or the most environmentally friendly alternative to the internal combustion engine, market forces would be your friend. But these forces have been drowned out by Nevada's state government and the billionaire who won its heart.Timothy P. Carney, The Washington Examiner's senior political columnist, can be contacted at email@example.com. His column appears Sunday and Wednesday on washingtonexaminer.com.