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Energy Economics Weekly Briefings

EV Tax Credits Are a Go But CAFE Past The Sell By Date

Written by: Ellen Hughes-Cromwick

Climate change is real and it is vital that we embrace solutions which mitigate its severe consequences on human activity.  Evidence based policy making would be ideal.  A commission with clout could break the gridlock.  This past week at the University of Michigan, partnering with Third Way, a group of active participants joined in discussions around the “Fastest Path to Zero.”  The second day ‘unconference’ included a discussion of what we could do to promote economic policies which would incentivize the transition to electrified vehicles.

There are many economic policies which are second or third best.  If we had the fortunate opportunity to collect evidence and develop economic policy from the ground up, a clean slate, we would end up with more efficiency, better outcomes, and at lower cost to society.  For example, most economists believe that a carbon tax would be an efficient way to make transparent the cost of emitting CO2.  Attaching a price to this stuff then allows all of us make better decisions about our activities.  As policy interacts and impinges on markets, like a carbon tax would do, then it could tackle the disconnect between what we pay for CO2 emitting activities and what products and services are produced which emit harmful CO2.  Such a tax steps into the fold where the market fails “we the people.”

This second and third best policy conundrum is very true for the mobility sector.  Leaving aside the important safety regulations which permeate the vital functioning of automotive and trucking companies, as well as suppliers, there are many policies which affect the markets for vehicles — both producers and consumers.

At the national level, bipartisan legislation was introduced in Congress this week which would extend and amend the existing electrified vehicle tax credit at the existing highest level of $7,500 and make it applicable to the first 600,000 vehicles sold by each manufacturer.  Michigan Senators Debbie Stabenow and Gary Peters are co-sponsors of this bill.

This Chevy Bolt in the image below gets a big boost from this existing tax credit, however GM reached the maximum number of sales for buyers to qualify for the highest $7,500 credit, resulting in a lower credit for future buyers.  Hence, the need for new legislation.

The Revero, shown below, has a monthly payment of over $1,000 per month, certainly qualifies for the $7,500 since very few of these units have been sold to U.S. consumers.

 

One of the co-sponsors of this legislation, Senator Lamar Alexander, said:  “The all-electric Nissan Leaf that I bought in 2011 had a hard time getting me from the Capitol to Dulles airport and back,” he said. “Its real range was about 70 miles. Today’s Nissan Leaf can travel 226 miles on one charge. Investing in American research and technology for better electric vehicles is one way to help our country and the world deal with climate change.”

While the federal tax credit is important, there are also several incentive programs being implemented at the state level.  Jato, an automotive consulting firm, released a report this week which summarizes the data on EV sales and EV incentives globally.  The map below from this report shows a substantial variation across the U.S. with California well ahead of most states in terms of EV sales and the number of incentive programs.

The effort to roll back CAFE (corporate average fuel economy) standards is important in the sense that it disincentivizes the efforts to improve fuel economy.  At this juncture, our policy makers, based on the climate change evidence, should be deploying tools designed to mitigate the use of fossil fuels in our mobility sector.  It is no surprise that California and nine other states have a zero emissions vehicle (ZEV) mandate.   This law requires producers to sell a certain percentage of zero emissions vehicles, with the market share of these sales rising over time.  Unlike a carbon tax, this is a supply side mandate that can generate an increase in EV sales more directly.  The challenge, as has been pointed out in the discussion of new CAFE rules, is a disparate set of regulations between ten states with a ZEV mandate and all other states.  The EPA Administrator has indicated that they will try to restrict the states’ ability to implement such a policy.  The final regulations are due to be issued in June 2019.  What we do know from the years of data now available on CAFE is that it has had very limited effect in generating fuel efficiency gains across all vehicles — cars and trucks — because of the policy design and implementation.  Even so, the evidence suggests that CAFE has worked, doubling the fuel economy of cars since it was enacted in 1975.  While not all of the gains can be attributed solely to the regulation, it has been a critical element in the product development process at auto companies.

CAFE is Past Its Sell By Date

To reiterate, a carbon or gas tax is much preferred to CAFE or other economic regulations designed to alter the fuel efficiency and/or emissions of cars and trucks on the road.  What may occur is that over time, state level incentives, combined with the global market movement toward electrified vehicles as many countries execute on their Paris Accord targets, could make CAFE a nonbinding constraints on the domestic manufacturers.  And, if the trend toward more automation is likely in the next decade, albeit at a measured pace, then the EV platform (i.e., the bottom part of the vehicle) will be critical for the electricity needed to power the automated vehicle content.

State Incentives

Now let’s turn to the state level incentives.  The Office of Energy Efficiency and Renewable Energy provides data on all types of incentives by state.  Jato has summarized these data in the map below, which shows EV sales penetration by state, measured as the EV market share, as well as the number of EV incentives by state in the bar chart below.

 

Where is Michigan?

As the bar chart above indicates, Michigan has four EV incentives, all of which pertain to charging infrastructure for EVs.  There are no direct EV credits in the state of Michigan.  Indeed, some current draft legislation by the new Governor proposes to impose a surcharge on the purchase of EVs in the state.  Coupled with a proposed $0.45 per gallon gasoline tax hike, these measures would help to fund improvements in the state’s roads and highway infrastructure.  On first blush, one could view the gas tax to be similar to a carbon tax.  It will disincentivize demand for car travel.  At the same time, an additional surcharge will attempt to maintain a level playing field between owners of conventional engine vehicles and EVs.  But will it?  And at what cost?  Michigan is home to 180,000 auto and auto supplier jobs as of March 2019.  And yet, we are lagging in production and sales of the new EV segment emerging in the global automotive industry.  

 

While California, New York, Florida, Washington, and Texas as the leading EV sales states (left panel above), several others rank highly when assessing EV market share — including Washington, DC, Oregon, Hawaii, Colorado, Massachusetts, and Maryland.  While four midwestern states account for nearly 40% of auto-related jobs, none of them rank highly in terms of EV sales or EV market share.

In Closing

There is a highway ahead, perhaps one for flying vehicles, as our University of Michigan students recently researched, but most certainly there is a road for EVs.  Climate change is real.  Michigan has much to gain if it is posed to ride the future wave of mobility.  It takes courage and leadership, both of which are assets of our state.