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60% of $18B in US clean energy tax credits 2006-2012 went to top 20% by income; 90% in the plug-in program

A working paper by a team at the Energy Institute at Haas, University of California, Berkeley, has found that 60% of the $18 billion in US federal income clean energy tax credits issued between 2006 and 2012—e.g., for weatherizing homes, installing solar panels, and buying hybrid and electric vehicles—went to the top income quintile in the US (above $200,000 per year). The bottom three quintiles (up to $75,000 per year) received about 10%.

The most extreme case, Severin Borenstein and Lucas Davis found through their examination of tax return data from the IRS, is the program aimed at electric vehicles—the top income quintile received about 90% of all these credits. As a result of the work, Borenstein and Davis conclude that tax credits are likely to be much less attractive on distributional grounds than market mechanisms to reduce GHGs.

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Electric Vehicle Credit. Average credit per tax return, by income level. Source: Borenstein and Davis. Click to enlarge.

It can often be easier politically to introduce subsidies than taxes, but the two are not equivalent. Probably the single biggest limitation of technology-based subsidies is that they don’t achieve the efficient level of usage, but economists have pointed out other limitations as well. For example, Holland et al. (2015) shows that the external benefits from electric cars vary widely (and can even be negative) depending on how electricity is generated.

A growing literature examines the efficiency and overall cost-effectiveness of clean energy technology subsidies, but the distributional effects have received much less attention. In this paper we use tax return data to examine the socioeconomic characteristics of taxpayers who receive US federal income tax credits. We focus on four major tax credits for individuals aimed at encouraging households to weatherize their homes, install solar panels, and to buy hybrid and electric vehicles. Since 2006, tax expenditures for these “clean energy” tax credits have exceeded $18 billion.

We find that these tax expenditures have gone predominantly to higher-income Americans.

—Borenstein and Davis (2015)

Between 2006 and 2012, total clean energy tax credit expenditures were $18.1 billion.

  • The largest of the tax credits is the Nonbusiness Energy Property Credit (NEPC) for homeowners who weatherize their homes or make other types of residential energy-efficiency improvements. This accounted for $13.7 billion in total tax expenditures over the period studies (75.7%).

  • The second largest clean energy tax credit is the Residential Energy Efficient Property Credit (REEPC), with a total of $3.5 billion (19.3%).

  • The Alternative Motor Vehicle Credit (AMVC) is for purchases of qualified hybrids, as well as natural gas, hydrogen, fuel cell, and other alternative fuel vehicles. The total for this credit was $549 million. The Qualified Plug-in Electric Drive Motor Vehicle Credit (PEDVC) is a credit for electric vehicles and plug-in hybrid vehicles purchased beginning in 2009, with a total of $346 million for the period. New energy vehicle-related tax credits thus totalled $895 million, or 5% of the total.

The authors observed that the size of the AMVC varied substantially across years, decreasing in 2008 after Toyota vehicles became ineligible and then increasing again in 2009 as more eligible hybrids become available. Hybrid vehicles are no longer AMVC-eligible after 2010, and the program became smaller. The plug-in credit increased significantly between 2010 and 2012 Although IRS data are not yet available for 2013 and 2014, the authors expect that expenditures on the PEDVC have increased in parallel with the ongoing increase in electric vehicle sales.

The PEDVC is much more concentrated than the other categories of credits. The bottom 80% of filers receive a little more than 10% of all credits, and the bottom 90% of filers receive only about 40% of all credits. It may simply be that electric vehicles, for the moment, are only affordable for relatively rich households. Even after the credit, electric and plug-in electric drive vehicles are expensive compared to equivalently-sized gasoline-powered vehicles. Another possible explanation is that in “green” communities (which tend to be high income), driving an electric vehicle could be perceived as a symbol of status. Kahn (2007) makes this argument about hybrids, but over the last several years this probably applies better to electric vehicles.

—Borenstein and Davis

Whereas tax credits are received disproportionately by high-income households, a carbon tax would be paid disproportionately by high-income households, the authors note—about four times as much as the bottom quintile.

It would seem difficult, therefore, to prefer tax credits over a carbon tax on distributional grounds. There may well be political considerations that continue to favor tax credits, but this approach comes at real cost, both in terms of efficiency and equity.

—Borenstein and Davis

Resources

Comments

Anthony F

The poorest individuals generally aren't homeowners or able to afford a vehicle. So they're not likely to see any benefit from these programs as designed. If you were to restrict the population to those eligible to receive credits (e.g. A homeowner or a household that owns at least one car) then I think the numbers would be more informative.

Also, I am curious if the study accounts for leases in the PEDVC calculations. An individual with more modest income may choose to lease an electric vehicle because he or she doesn't have the $7500 of income tax to rebate if they were to buy the vehicle. While the leasing company ends up receiving the tax credit, the individual leasing the car sees the benefit through a lower lease rate.

Honestly, if the authors are interested in positive environmental outcomes and distributional justice, then maybe they should just be campaigning for massive federal subsidies for mass transportation to the point where it's free for everyone.

mahonj

What did they expect: Evs and PV systems and insulation are all cash intensive with big up-front payments. Only the rich can afford them easily.
You would have to combine the grants with a payment scheme to enable the poorer sections of society to benefit.
+ the poorest don't own their houses, so PV and insulation are probably out, and but used cars, so Evs are also out.

It depends on what you are trying to do:
if you are just trying to increase the market for EVs, it can be seen as a success - if you are trying to spread EVs through all strata of society, it has failed - but why would you do that ? The early adopters are typically richer people with money to spare.

Jer

Low- to zero-interest loans with easier-than-typical terms (including 90-day no-cost returns) and low credit quality may be the only way to get these systems out there for the middle three quintiles. Couple that with home installation (for EV fast charge systems) and guaranteed limited time offsite recharge rates at widespread stations and you are not only empowering the owner (some may say underwriting) you are establishing an ecosystem of work for Contractors and EV station developers. Finance the ecosystem not only the front line consumers - Tesla knows this.

Account Deleted

Everybody high and low benefit from zero pollution vehicles as they do not pollute the air and climate that we all depend on. That said a more social just incentive system for propagating zero pollution cars would be to outlaw sales of polluting cars if they cost more than say 70,000 USD. Automakers in non-compliance should be fined say 20,000 USD per car sold that cost over 70,000 USD and still using a polluting combustion engine. Over time the selling price that will trigger a ban on polluting vehicles should be lowered as battery prices (or fuel cell cars) falls in price thereby enable car makers to switch to zero pollution vehicles without large extra costs for car buyers.

The fine feature about the suggested solution is that taxpayers are not involved so it cannot be socially unjust. Also people that can afford a 70,000 USD car can also afford to have it zero emission. There is really no excuse for allowing expensive cars that pollute.

The other thing is that when self driving cars arrives everything will go BEV anyway as this is the lowest cost technology when operating a self driving taxi at 100,000 miles per year. So the problem will disappear.

ChrisL

The authors are nitwits! By providing the incentive as a tax credit rather than a rebate, the government is excluding everyone who pays no taxes, including retired people (such as myself) who own their houses and cars outright, and are living off their savings. I am a big EV fan, and can afford to buy one, but I refuse to pay $10K more for an EV than what people with big incomes would pay for the same car. That's socially unjust.

HarveyD

Tax credits and initial purchase incentives benefit (mostly) the wealthiest 10% who can afford to invest and/or who pay higher rate income taxes.

To reverse this unwanted effect, a sliding scale could be used, whereas maximum benefits would apply to very low income earners (up to $20K to $30K or so) and sliding lower benefits for higher income earners ($30K to $130k/year) and zero benefits for high income earners (above $130K/year) or so. ALL income should be used including capital gains, dividends, interest, lotto gains, other benefits etc.

CheeseEater88

My personal belief is that they should have done upfront rebates, limited it to those making less than 75K a year or something fairly rational.

It makes no sense to me to have "tax refunds" for people trying to purchase a $100K car. So cap the rebate to cars/trucks 30% above the mean price of that size segment(such as A,B,C/D, LT cars and trucks).

Again, I think this program only benefited those who could purchase the vehicles regardless of incentives. You still have the full price of the vehicle to cope with, you may just get some money back on your taxes.

Leasing, is where this program actually helped. It allowed ordinary middle class to get into Leafs and Foci that would have ordinarily been a stretch for them, as the rebates were upfront at the time of signing.

I'm still hoping for those $54/Kwh batteries to hit mass production in 8 years so I can get an EV-SUV with some great range.

electric-car-insider.com

ChrisL, one way to get the credit (and a great deal) is to lease. Leases are usually more expensive, but not for EVs, because in most cases, the leasing company passes the $7,500 credit through to the purchaser in the form of a Cap Cost Reduction or at very least a smaller residual.

Nine EVs can be leased for less than $200 per month, some for as little as $139. For anyone saving more than that in their monthly fuel bill, these are "free" cars (pay petrol bill or pay lease payment) For folks with older cars, an especially good deal - no maintenance cost for the first three years (possibly tire rotation, free at Discount Tire).

I know a lot of people like to own outright and pay cash. I own most of my vehicles too. But the lease deals are really, really good if you're ditching a gasser.

Neal G wrote a great article on the subject in the current issue of ECI. Includes tables with detailed numbers for over a dozen EVs. On the newsstand or at Apple iBookstore.

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