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In Defense of Tesla's Price Tag

Author: Michael A. Levi, David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Maurice R. Greenberg Center for Geoeconomic Studies
May 13, 2013
Fortune Magazine

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Tesla Motors made news last Wednesday when it posted its first quarterly profit. But the maker of luxury electric vehicles continues to come under fire.

The U.S. government gives a $7,500 tax credit to anyone who buys one of its cars, but at more than $70,000 for a Model S sedan, only the rich can afford to benefit. The Department of Energy has also provided the Palo Alto, Calif.-based company with a $465 million loan guarantee, which boosts returns for Tesla's wealthy owners while putting taxpayers' money at risk. No wonder many are furious with Washington for "subsidizing cools cars for rich people."

The truth, though, is that selling Teslas (TSLA) to wealthy people today may be the best way to get electric cars to everyone tomorrow, and for the United States to eventually reduce its dependence on oil, with all the national security and economic benefits that entails.

The U.S. economy is making big gains as domestic oil production rises, but high U.S. oil use leaves the nation vulnerable to dangerous spikes in the price of crude. With biofuels and fuel cells both faltering, electric cars may be one of the best ways out.

But electric cars face a massive uphill battle. They lack the economies of scale and track record that traditional cars enjoy. They don't have the hundred-plus years of experience that's allowed their competitors to bring technology costs down.

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