Subsidising Electric Cars Is Perverse

  • Date: 04/05/19
  • Steve Pociask, Real Clear Energy

Electric cars are overwhelmingly a luxury of the wealthy. Even if the number of electric cars in the U.S. grew substantially faster than current projections, their cumulative impact on climate trends would amount to a rounding error.

For more than a decade, the federal government has picked winners and losers in the automobile market by heavily subsidizing electric vehicles (EVs). Now, with those subsidies set to phase out for the largest EV manufacturers, some lawmakers are now pushing to have the subsidies greatly expanded.

The EV tax credit, which has been around since 2008, offers consumers a subsidy of up to $7,500 off the price of a qualifying EV. Because the original intent of the credit was merely to help the nascent EV industry gain a foothold in the market, the credit is set to gradually phase-out for manufacturers that sell more than 200,000 EVs in the U.S.

Both General Motors and Tesla have recently crossed the 200,000 threshold, so their subsidies are set to expire in 2020. Other manufacturers are approaching the cap as well, and all are clamoring to have the 200,000-vehicle cap removed — at an enormous cost to taxpayers.

The credit’s current costs are estimated to be $7.5 billion from 2018 to 2022, or about $1.5 billion per year. Removing the cap on the credit would cost Americans households $95 billion in lost income over the next 15 years ($610 per household), or more than $6 billion per year, according to a recent study commissioned by the Institute for Energy Research.

To justify these staggering costs, advocates of the credit claim that electric cars as “critical to lowering our emissions and limiting climate change.” But the numbers tell a different story. Research by the Manhattan Institute found that EVs will reduce energy-related U.S. carbon dioxide emissions by less than 1% by 2050. “That reduction will have no measurable impact on world climate—and thus the economic value of CO2 emissions reductions associated with [electric vehicles] is effectively zero,” according to the study, which also found that the spread of EVs would actually increase other harmful pollutants like sulfur dioxide and nitrogen oxides.

Calculations by the International Energy Agency and independent analysts produce similar estimates. The bottom line: Even if the number of electric cars in the U.S. grew substantially faster than current projections, their cumulative impact on climate trends would amount to a rounding error.

Supporters of the EV credit also tend to ignore its deeply regressive effects. While the credit is disproportionately financed by lower- and middle-income taxpayers who cannot afford to purchase EVs, the benefits of the credit flow to a small segment of high-income households, many of which would have purchased EVs even without government inducements. 

Of the 57,066 households that received the credit in 2016, 78 percent had at least a six-figure income and 7 percent reported more than $1 million in income. By contrast, less than 1 percent of all EV credits went to households earning less than $50,000 in 2014, meaning that about half of Americans receive virtually no benefit from the credit. Manufacturers’ own data shows that EVs are overwhelmingly a luxury of the wealthy. Tesla’s customers have an average household income of $293,200 while even the buyers of the more modestly-priced electric Ford Focus have an average income of $199,000.

On top of the $7,500 available through the EV tax credit, electric cars owners don’t pay gas taxes to help support the roads they use, shifting more of the burden onto ordinary drivers and contributing to a massive funding deficit for our surface infrastructure.

Despite numerous federal and state incentive programs — of which the EV credit is just one — designed to coax consumers into buying EVs, Americans aren’t biting. In 2017, the 199,826 plug-in EVs sold in the U.S. made up barely 1 percent of the market. And it’s not hard to see why. Even after counting savings on fuel, EVs cost about $5,000 more over their lifetimes than internal combustion cars. Drivers are also turned off by the inconvenience of EVs’ short ranges and long recharge times.

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