EV Subsidies Likely to Have Minimal Impact
This is the third part to a series of posts on this topic. Scroll to the end to find the most recent posts.
In this installment of our series on Build Back Better (BBB), we examine the legislation’s policies for supporting new electric vehicles (EVs). President Joe Biden asserted that EVs should account for 50 percent of light-duty vehicles by 2030. However, it is currently projected that 343 thousand light-duty EVs per year will be sold by 2030—about 3 percent of light-duty vehicle sales. Transportation emissions are the largest source of greenhouse gas emissions in the United States, accounting for 29 percent of total emissions, and light-duty vehicles are responsible for more than half of transportation emissions. Clearly, one would expect this to be a big policy focus for BBB, and this piece aims to examine its impact in that regard.
BBB Policies for EVs
BBB includes several subsidy programs designed to increase the deployment of EVs and other alternative fuel vehicles. Notably, hybrid vehicles are generally ineligible for these subsidies, except for plug-in hybrid vehicles or commercial hybrid vehicles, which receive a reduced credit value compared to electric commercial vehicles. There are a number of tax credits included in BBB: for light-duty EVs, the credit ranges between $4,000 and $12,500, depending on battery size, domestic content and labor standards; for commercial EVs, it is 30 percent of the cost; and for commercial hybrids, 15 percent of the cost. Tax credits are also provided for the deployment of new charging infrastructure and for lower-emission fuel types. The largest of these credits are the tax credits for light-duty EVs ($9.2 billion) and the funding for commercial and heavy-duty vehicles, which includes $4.7 billion in tax credits plus $5 billion in grants for high-pollution areas. BBB also includes a $1.7 billion credit for used EVs, as well as credits for alternative fueling and charging properties. EVs are also eligible for numerous climate-related grants in other BBB provisions, and overall there are $24 billion of zero emission vehicle subsidies and $89 billion of “zero emission vehicle eligible subsidies.”
There is substantial complexity in how BBB approaches subsidies for EVs and zero emission vehicles, but this information can be distilled into an estimate of the cost of one policy: the refundable tax credit for new light-duty EVs, covering $4,000 to $12,500 of the cost. One would expect that if someone were incentivized to purchase a new EV over an internal combustion engine vehicle (ICEV) due to the availability of a tax credit for a charging station, then that person would also claim the tax credit for the new EV. In this case, the $9.2 billion in tax credits for new EVs estimated by the Congressional Budget Office (CBO) gives us a window into how much the CBO expects the tax credits to change behavior.
To give a ceiling of the maximum number of new light-duty EVs BBB could support, we assume that all new EVs claim only the minimum $4,000 per vehicle credit. With that assumption, we expect 2.3 million new light-duty EV sales from 2022 through 2031. This comes in just slightly under the U.S. Energy Information Administration’s (EIAs) projected 2.5 million new EV sales over the same period. Essentially, even under favorable assumptions, it seems that the projected subsidy for new EVs would indicate that BBB is not expected to increase the uptake of EVs at all.
Sources: EIA AEO 2021 and R Street Institute estimates based on CBO estimated budgetary effects of HR 5376.
At some level, the subsidies should increase market uptake, but the cost estimated by the CBO would indicate that many of the credits will go to households that are already expected to purchase an EV.
Essentially, we expect that while the presence of the subsidy will marginally increase EV uptake in the light-duty vehicle market, the difference relative to no subsidy will be small. Thus, the environmental benefit of the program will be low compared to its cost. Like the renewable electricity subsidies, this is consistent with the economic literature, as the cost per ton of greenhouse gas abated through EV subsidies has been estimated to be between $350 and $640. Furthermore, the literature on EV uptake finds that vehicle purchasing decisions are often influenced by factors other than cost, and even though EV subsidies can increase EV adoption, most of the subsidies go to households that would buy EVs anyway. In a nutshell, the CBO assumption that expanding EV subsidies will not have much impact is consistent with our current understanding of EV subsidy efficacy.
Alternatively, the CBO could be far off in its estimate, and the presence of the subsidy could significantly increase EV adoption—but under such a scenario, the cost of the subsidy would become enormous. For example, to reach President Biden’s EV sales target of 50 percent by 2030, the EV share of light-duty vehicle sales would have to increase by about 5 percent per year. Reaching that target linearly would result in 45 million new EV sales through 2031 and would cost $182.7 billion to subsidize at $4,000 per vehicle or $570.9 billion to subsidize at $12,500 per vehicle—about 20-60 times higher than BBB’s claimed expenditures for new light-duty EVs.
Because there is limited data on the expected price of commercial EVs in the future, and it is not yet clear how grants for electrifying commercial vehicles might be distributed, this analysis does not assess the environmental benefits of the pertinent subsidies. However, it should be noted that Resources for the Future (RFF) recently analyzed the topic and estimated that the subsidies could significantly increase the number of electric commercial vehicles produced due to the early stage of the technology. RFF estimated that the abatement cost of the tax credits for commercial EVs would be between $259 and $480 per ton. RFF further estimated an emissions benefit in the year 2030 by up to 21 million metric tons of CO2 and that the effect of the subsidies would account for 1.4 percent of President Biden’s 2030 emission goal.
Walking back from the CBO’s estimated subsidies for new light-duty EVs indicates that the tax credit seems to result in almost no increase in EV adoption at all. While there have been many endorsements for President Biden’s EV policies and support, a clear disconnect exists between the policy ambition and what the experts at the CBO expect in terms of outcome. There is potentially more benefit in the realm of commercial vehicles, which makes sense, as this is a newer technology and tax credits are therefore more likely to have an impact. Adoption of EVs in the market is more heavily influenced by factors other than the presence or value of subsidy, and the cost estimates from the CBO reflect that.
Image credit: scharfsinn86
INTRODUCTION – Build Back Better: How Much Bang for the Buck?
PART 1 – The Costs and Benefits of Nuclear Power Subsidies
PART 2 – The Inefficiency of Renewable Energy Subsidies
PART 3 – EV Subsidies Likely to Have Minimal Impact
PART 4 – Alternative fuels subsidies are small in size but with interesting potential
CONCLUSION – BBB Series Summary and Conclusion