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Tax Credits and Rebates for Electric Cars Benefit US Drivers and Automakers

, senior engineer, Clean Vehicles | September 19, 2017, 10:24 am EST
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Leadership on vehicle electrification is critical to tackling climate change, protecting consumers from volatile oil prices, maintaining the competitiveness of US automakers, and creating 21st century manufacturing jobs. However, electric vehicles (EVs) currently cost more to manufacture than comparably sized gasoline-powered vehicles, which can mean higher prices and slower adoption.  One important policy solution to help accelerate the rate of EV sales is to offer purchase incentives to potential EV buyers, as discussed in a new policy brief “Accelerating U.S. Leadership in Electric Vehicles” that I co-authored with my UCS colleague Josh Goldman.

Incentives, such as tax credits and rebates, encourage EV sales while automakers scale up manufacturing and technology improves. Much of the additional cost of making an EV is due to the battery, and this scale up of EV manufacturing, along with improved and novel battery technology, will reduce the cost of manufacturing EV batteries and make EVs more cost competitive.

Modern EVs have only been offered for seven years, yet during that time we have seen impressive reductions in the cost to produce automotive battery packs. Initially, costs of EV battery packs were estimated to cost over $750/kWh of storage capacity. Now battery costs have fallen to around $200/kWh, with further reductions predicted by industry analysts. Once battery costs reach the range of $125-$150/kWh, the costs of EVs are projected to reach parity with conventional vehicles.

As battery costs continue to decline the cost difference between EVs and conventional gasoline vehicles will fall, although the exact date at which EVs achieve cost parity ($125-150 per kWh) depends on the rate of EV sales and other factors. References for data sources available online.

It may make sense to reduce broadly-available incentives after EVs become more price competitive, but removing them too soon would stall U.S. leadership in a critical technology.

The US federal income tax credit, in particular, is a vital investment in the transition to electric vehicles. The credit provides a credit of up to $7,500 per EV, based on the size of the battery. Most battery-electric and long-range plug in hybrids qualify for the full credit value. However, this credit begins to phase out for a manufacturer once they sell 200,000 electric vehicles in the US.

Market leaders General Motors, Nissan, and Tesla are already over 100,000 cumulative EV sales as of mid-2017. General Motors and Tesla will likely hit the phase out first, probably before the end of 2018, especially if their new more affordable long-range EVs (Chevy Bolt EV and Tesla Model 3) sell well. Therefore, this phase out has the perverse effect of penalizing some of the leaders in EVs and notably EVs that are coming off assembly lines in the US (including all Tesla, General Motors, and Nissan EVs sold in the US), while other manufacturers like Honda would have incentives available for years to come.

The federal EV income tax credit phases out for a manufacturer’s EV models once they exceed 200,000 sales. General Motors and Tesla are on pace to hit the sales cap within 18 months, and Nissan is not far behind.

State incentives are also important to accelerate the switch from gasoline to electricity for our driving. The largest program, California’s Clean Vehicle Rebate Project, has helped over 200,000 buyers make the change to electric drive. And other states have also stepped up to support the transition to cleaner cars. For example, Josh Goldman blogged recently about Oregon’s newly enacted EV rebate program.

Increasingly, we are seeing studies that predict sales of EVs will overtake gasoline cars in the next 10-20 years. However, it is still important to support the nascent EV industry, both to increase the number of EVs on the road now and to support the US automakers that are leading this vital transition.

Purchase incentives for plug-in EVs have been a critical policy tool, accelerating the manufacture and adoption of EVs and making them accessible to car buyers. These investments in EV technologies are helping automakers transition to new technologies and enabling Americans to drive cleaner and cheaper.

In particular, the federal EV tax credit is essential. Not only is it important for US drivers, but it also for US manufacturers. With a number of countries announcing bold EV efforts (such as France, China, and India), letting the tax credit expire for leading US EV manufacturers could be a costly mistake.

Now is not the time to end a policy that works. Instead, the federal government should extend the credit to ensure continued progress, build upon success, and keep the United States in the lead with 21st century automotive technology.

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