Making electric vehicles affordable for the rest of us

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Op-Ed: Subsidies for electric vehicles are poorly designed and mainly benefit the wealthy. Six things policymakers could do to make EV subsidies more effective and equitable.

As an environmentalist who takes the kids to town, I would like to buy an electric car. But here in South Carolina, the cheapest electric vehicles (EVs) are at least three times as expensive as my used VW Jetta. What about those big government grants, you ask? The truth is that electric vehicle subsidies overwhelmingly benefit the wealthy, not middle-income people like me.

The US federal government will give you up to $7,500 in electric vehicle tax credits, but you only get that money at tax time, and you only get it if you pay a lot of taxes. In 2016, 78% of federal electric vehicle tax credits went to taxpayers with incomes over $100,000.

My research has shown that most of these tax credits, as well as state subsidies, are paid to consumers who would have purchased the EV even without the added benefit. And often they go to people who treat them like extra cars rather than gas-guzzling substitutes, or who don’t drive them often enough for the gas savings to outweigh the environmental cost of making the car first.

It is a waste of government money.

In the face of climate change, we need to accelerate the transition to electric transportation (assuming the United States produces enough renewable electricity to power it). The Biden administration’s goal is for electric vehicles to account for 50% of new car sales by 2030, but the current share is less than 5%. Subsidies as they exist do not help to put enough new electric vehicles on the road. They are also unfair to poor communities.

Low-income households already suffer more from poor air quality that comes from tailpipe emissions. They also pay a larger share of their household budget in gasoline and could therefore save more by driving electric vehicles if they could not afford it.

Here are six things policymakers could do to make EV subsidies more effective and equitable:

  1. Place a price cap on eligible vehicles. The goal is to have more electric vehicles on the road, not to have luxury cars on the road. This would free up more funds to target low- and middle-income households. Some places already do. Since 2019, California has had a price cap of $60,000, which it recently lowered to $45,000 for passenger cars, calling popular models like the base Nissan Leaf, Chevrolet Bolt and Tesla Model 3, but disqualifying most luxury electric vehicles and high-end Teslas. A ceiling of $40,000 seems reasonable to me.
  2. Increase subsidies for low-income households that could not otherwise afford electric vehicles (and eliminate them for the highest-income households). California has also been doing this for several years. My research on one of the state’s pilot programs found that increasing electric vehicle rebates for low-income households improved the program’s cost-effectiveness by 1.7 times, while increasing subsidies. for low-income households from $2,500 to $9,500. This year alone, Oregon has significantly increased its rebates for low- and middle-income households; other states and countries are expected to follow suit.
  3. Deliver subsidies closer to the point of sale, through a rebate, for example. Low-income households often cannot claim much of the benefits of income tax credits (because their income is low) and are more sensitive to upfront costs. Subsidies should not keep them waiting. Many states offer discounts, including California, Connecticut, Delaware, Illinois, New Jersey, New York, Oregon, and Pennsylvania. Others should do the same.
  4. Offer cheaper loans. Making subsidized, government-backed loans available to low-income households with poor credit could help them access reasonable financing for electric vehicles at a relatively low cost to the government. After piloting such a program, California recently partnered with a lender to offer loans with a maximum interest rate of 8%, regardless of credit history.
  5. Scale of subsidies based on mileage. To maximize the environmental benefits of electric vehicles, ideally they would be driven by the people who drive the most. It could also contribute to equity: since low-income consumers often cannot afford to live in urban cores, they may face longer travel distances. This would be a trickier policy to implement. One option would be annual “bonus” subsidies after purchase based on the odometer of the EV. So far, I don’t know anyone who tries this; it’s worth experimenting.
  6. Subsidize used electric vehicles. Until recently, the subsidies were entirely for new electric vehicles. Subsidizing used electric vehicles makes them much more accessible. These policies should be carefully designed to prevent sellers from raising prices. California, Connecticut, Oregon and Pennsylvania have recently started offering subsidies for used electric vehicles.

The Build Back Better bill proposed by the Biden administration incorporated some of the above suggestions in a weak way (eliminating subsidies for households earning more than $500,000 and for electric vehicles costing more than $55,000). But that bill died earlier this year. Biden has now turned to promoting domestic battery manufacturing. I’m not sure this will move the needle on domestic EV production, or pass the savings on to the consumer.

EV subsidies have huge potential to put more EVs on the road and improve equity without spending more money. They are one of the few decarbonization policy tools that are both politically acceptable and popular with consumers in many areas. But they need a radical overhaul to get gas guzzlers off the road and meet climate goals.

This op-ed originally appeared in Knowable Magazine and is part of Covering Climate Now, a global journalism collaboration bolstering coverage of the climate story.

Tamara Sheldon is an economist at the University of South Carolina and studies electric vehicle adoption and policy.

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