Since the beginning of 2009, the federal government has offered tax credits to consumers of plug-in hybrids (PHEVs) and fully electric vehicles (EVs). Depending on battery size, the tax credits range from $2,500 to $7,500, and are projected to cost the government nearly $2 billion by 2019. In the wake of heated political ideology surrounding the government-backed EV industry, I was eager to read what the Congressional Budget Office (CBO) had to say about the tax credits.
Over the short term, the CBO report found that “tax credits will have little or no impact” on gasoline consumption and greenhouse gas emissions. Surprisingly, the negligible impact of tax credits is caused by the presence of Corporate Average Fuel Economy (CAFE) standards. Since CAFE standards measure the average efficiency of an automaker’s entire fleet, sales of EVs are likely offset by higher sales of lower-efficiency vehicles. This would mean that while Toyota may increase sales of the Prius, it also would be able to sell more pickup trucks and SUVs while still meeting the CAFE requirement. The short-term cost of the credits to the government was also startling. Though CBO’s estimates vary widely, it found that it costs the government between $3 and $7 for each gallon of gasoline saved (mostly influenced by battery size), and between $230 and $4,400 for each metric ton of carbon dioxide reduced (depending on the source of electricity).
Despite the bleak short-term outlook, significant progress and savings can be realized over the long term. Since tax credits were found to have the largest impact on increasing EV purchases, they could play an important role in stabilizing the industry. If the industry is able to survive independently, it could influence or increase future CAFE requirements. Additionally, the long-term survival of the EV industry would produce significant financial and emissions reductions, thereby offsetting today’s hefty investments.
In the wake of over a dozen fires and serious financial troubles for Fisker, and missed production and revenue targets for Tesla, it’s understandable why many are concerned about the industry. Progress is being made, but EVs are off to a bumpy start.
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