Congressional Budget Office estimates US federal policies promoting EVs and other fuel-efficient vehicles will cost $7.5B through 2019; little or no impact on gasoline use and GHG in the short term
21 September 2012
|Tax credits and gasoline prices necessary for various electric vehicles to be cost-competitive with conventional vehicles at 2011 vehicle prices. Source: CBO. Click to enlarge.|
The nonpartisan US Congressional Budget Office (CBO) estimates that federal policies to promote the manufacture and purchase of electric vehicles, some of which also support other types of fuel-efficient vehicles, will have a total budgetary cost of about $7.5 billion through 2019.
In a new report examining the effect of federal tax credits on the plug-in market, the CBO finds that tax credits for buying electric vehicles—which account for about one-fourth of the policy cost—are likely to have the greatest impact on vehicle sales. The report also finds that while tax credits for EVs will have little or no impact on the total gasoline use and greenhouse gas emissions of the nation’s vehicle fleet over the next several years, the credits can affect future gasoline consumption and emissions if future revisions to the CAFE standards are influenced by current sales of electric vehicles and expectations about future sales.
The electric vehicles that are the focus of this study fall into two broad classes: plug-in hybrid electric vehicles and battery-electric vehicles.
At current vehicle and energy prices, the lifetime costs to consumers of an electric vehicle are generally higher than those of a conventional vehicle or traditional hybrid vehicle of similar size and performance, even with the tax credits, which can be as much as $7,500 per vehicle, the report concludes. That finding takes into account both the higher purchase price of an electric vehicle and the lower fuel costs over the vehicle’s life.
For example, an average plug-in hybrid vehicle with a battery capacity of 16 kWh would be eligible for the maximum tax credit of $7,500. However, that vehicle would require a tax credit of more than $12,000 to have roughly the same lifetime costs as a comparable conventional or traditional hybrid vehicle.
Assuming that everything else is equal, the larger an electric vehicle’s battery capacity, the greater its cost disadvantage relative to conventional vehicles—and thus the larger the tax credit needed to make it cost-competitive, the report says.
Tax credits for these plug-in electric-drive vehicles have multiple direct and indirect effects on the total amounts of gasoline consumed and greenhouse gases emitted by the US transportation sector.
The direct effect of the credits is to subsidize purchases of electric vehicles—including purchases that would have been made even without the credits. Those people who purchase electric vehicles because of the tax credit use less gasoline and produce fewer emissions of greenhouse gases than would otherwise be the case. The cost to the government of those reductions in gasoline consumption and emissions can vary widely.
Indirect effects. Increased sales of electric vehicles allow automakers to sell more low-fuel-economy vehicles and still comply with the federal standards that govern the average fuel economy of the vehicles they sell (known as CAFE standards). Consequently, the credits will result in little or no reduction in the total gasoline use and greenhouse gas emissions of the nation’s vehicle fleet over the next several years. As a result, the cost per gallon or per metric ton of any such reductions will be much greater than the cost calculated on the basis of the direct effects alone.
Over the longer term, the analysis finds, the tax credits can affect total gasoline consumption and emissions if future revisions to CAFE standards are influenced by current sales of electric vehicles and expectations about future sales. If the credits play an important role in helping the US electric vehicle industry become self-sustaining, their effect on vehicle sales might continue to affect CAFE standards and the resulting amounts of gasoline use and emissions for years after the expiration of the credits.
As of yet, no reliable estimates exist of the share of electric vehicle sales that can be attributed to the tax credits—that is, of the number of vehicles that would not have been sold without those credits. However, researchers have analyzed the earlier tax credits that applied to pur- chases of traditional hybrids (which expired at the end of 2010) and estimated that they were responsible for roughly one-quarter of all sales of those vehicles. On the basis of that research, CBO estimates that the current tax credits will be responsible for 30 percent of all electric vehicles sold. That share is slightly higher than the estimate for the earlier tax credits because the current credits are larger (a maximum of $7,500 rather than $3,400) relative to the cost of the vehicles.
The effects of the tax credits may extend beyond additional sales of electric vehicles, however. By lowering the effective purchase price of electric vehicles, the credits are likely to cause manufacturers to reduce prices of competing high-fuel-economy conventional and traditional hybrid vehicles, thus raising the average fuel economy of other, nonelectric vehicles sold. That effect may be large. The results of one study on the energy and environmental gains from the tax credits for traditional hybrids suggest that the benefits from increased sales of higher-fuel-economy conventional vehicles were about one and a half times the benefits from sales of the hybrids themselves.
The relative size of those various gains depends on how many vehicles are sold. Low sales of electric vehicles would not greatly affect the average fuel economy of conventional vehicles. At least in the near term, sales of electric vehicles will probably not be as large as sales of traditional hybrids have been—because of differences in their costs—so the impact of electric vehicles on the average fuel economy of other vehicles will probably be smaller than was found for traditional hybrids. CBO assumes that those spillover effects will be about half as large as the direct effect from sales of electric vehicles. Thus, in CBO’s analysis, the total reductions in fuel use and greenhouse emissions from electric vehicles are 1.5 times the direct reductions.—“Effects of Federal Tax Credits for the Purchase of Electric Vehicles”
Possible future policies. Changing the size of the tax credits would affect the cost of the credits to the government, but would have little, if any, effect on gasoline use or emissions over the short term, because automakers would still have to meet existing CAFE standards, the report finds. Increases or moderate reductions in the number of credits available would probably have little near-term impact on either the government’s costs or the credits’ benefits to society.
However, changes in the size or number of the credits could affect future CAFE standards by influencing regulators’ expectations about future sales of electric vehicles. The extent of such influence would be difficult to predict, however, as would the long-term costs and benefits of such changes.
Another option suggested in the report is increasing the federal excise tax on sales of gasoline, which would tend to reduce gasoline use and emissions. Other policies, such as a tax on the carbon content of fossil fuels, could focus on low-cost reductions in emissions outside the transportation sector. They would tend to minimize the total cost of achieving a given reduction in emissions, but they would not specifically target gasoline or oil consumption and would probably have little effect on the development of the electric vehicle industry.
EDTA response. In response to the CBO report, Brian Wynne, president of the Electric Drive Transportation Association (EDTA), issued the following statement:
The Congressional Budget Office (CBO) report ‘Effects of Federal Tax Credits for the Purchase of Electric Vehicles’ can be another useful contribution to the conversation on the benefit of investment in electric drive. It is important to highlight, however, some of the report’s acknowledged limitations. In evaluating the effectiveness of the credit, the report provides the caveat that ‘As yet, no reliable estimates exist of the share of electric vehicle sales that can be attributed to the tax credits.’
EDTA agrees that economies of scale and ongoing technological advances will reduce vehicle costs and consumer tax incentives can help achieve them. While we do not agree with all of the assumptions made and relied on in the report, CBO’s illustrations do show that tax incentives can help move electric drive into the mainstream and reduce gasoline use and emissions, while growing the industry.
Carnegie Endowment suggests policies to advance the plug-in market. Separately, the Carnegie Endowment is releasing a policy paper urging more government support for the nascent electric vehicle market. Among the key recommendations:
Motivate PEV (plug-in vehicle) manufacturers. Policies that help boost PEV sales will foster the large-scale commercialization of electric vehicles, the report suggests. In particular, policies should more broadly distribute tax incentives for purchasing these vehicles, and federal electric-vehicle programs should be extended and expanded to provide direct financial incentives to PEV manufacturers. Auto dealers leading the way in PEV sales should also be rewarded.
Shine the spotlight on states. Those states making the most headway in advancing low-carbon electric vehicles should be held up as examples to help assure uncommitted states of the opportunities offered by PEV commercialization. They should also be benchmarked to maintain their lead- ing edge, and states should move away from fuel taxes and toward carbon pricing to compensate governments for their lost revenue.
Cultivate local PEV clusters. The federal government should target PEV policies at those regions where cleaner, renewable electricity is already generated because expanded PEV use in those regions will reduce carbon emissions. Similarly, programs should be targeted at cities already facilitating PEV use.
Promote PEV interactions with utilities. The transition to PEVs will be discouraged if electric-vehicle drivers who need to charge their cars face excessive electricity prices. Utility providers must be encouraged to revisit their electricity rate designs, invest strategically in recharging infrastructure, and investigate the effectiveness of decoupling regulations.
Policy Priorities For Advancing The US Electric Vehicle Market Deborah Gordon, Daniel Sperling, and David Livingston
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