The Economic Standard: EV Subsidies are a Renewable Waste

As part of his recently released infrastructure plan, President Joe Biden has vowed to overhaul the American electric vehicle (EV) industry with $174 billion worth of spending. But in his rush to spread the cash around, President Biden appears to be doubling down on environmentally inefficient and socially regressive initiatives. Rather than wasting taxpayer money on outdated policies, the Biden infrastructure plan should learn from past mistakes to support consumers and the environment.

The EV provisions form part of Biden’s $2 trillion spending blow out, nestled somewhere between his plans to re-upholster Amtrak seats and de-barnacle the country’s fleet of ferries. In addition to retooling traditional automotive factories and replacing the Postal Service’s fleet with electric vehicles, the plan seeks to give consumers “point of sale rebates and tax incentives to buy American-made EVs.”

While the details remain vague, this promise looks a lot like the existing federal tax rebate for EV purchases. Under section 30D of the Internal Revenue Code, EVs and hybrid vehicles purchased since January 2010 are eligible for a federal tax credit of up to $7,500. Buyers become ineligible once an automaker sells more then 200,000 EVs, but there is speculation that Biden could remove that cap.

What is wrong with subsidizing EVs through rebates and tax credits? There is increasing academic critique of their environmental efficiency, their cost-effectiveness, and their ability to spur EV uptake. For consumers and taxpayers, there is good reason to be skeptical as to whether blanket rebates and tax incentives really offer the best return on climate mitigation investment.

At first glance, the logic behind the Biden plan is simple. Subsidies make EVs relatively cheaper and, consequently, more people can afford them. This idea was outlined in an influential 2014 study, in which co-authors Sierzchula, Bakker, Maat, and van Wee found cautious evidence that charging infrastructure and, to a lesser extent, consumer financial incentives were correlated with EV market share.

But more recent research has questioned whether blanket financial incentives for EVs are the most cost-effective way to boost EV uptake. A 2016 study in Sweden found that subsidies were less effective among potential buyers who were already interested in purchasing an EV. Similarly, a 2019 study by Sheldon and Dua found that federal EV subsidies could be made more efficient by targeting lower income consumers. A June 2017 Economic Note from the Montreal Economic Institute underscores the environmental waste of blanket subsidies, arguing that the net environmental impact of a subsidy for someone who would otherwise still purchase an EV is zero.

The environmental merits of EV subsidies were also scrutinized in a 2019 study in the Journal of Environmental Economics and Management. The authors found that while state-level financial incentives were associated with higher EV uptake, the “implementation and welfare costs for direct financial incentive programs exceed the benefits of avoided near-term emissions” in most American states.

Considered together, these studies cast doubt on whether blanket EV subsidies are really the most cost-efficient or environmentally-beneficial use of taxpayer money to address emissions.

Other recent academic research has highlighted how financial subsidies are just one factor in the rise and spread of EVs. In a study published in 2019, Wang, Tan, and Pan find that higher gasoline prices, more EV chargers, and greater access to bus lanes and HOVs were the primary predictors of higher EV market share across the globe, rather than EV subsidies.

This need for more creative thinking about ways to limit transportation emissions is also underscored by a 2020 study in the influential journal Energy Policy. Making the case that electric vehicle subsidies are misguided when compared to efficiency standards for conventional vehicles, the study’s author argues that promoting EVs has the “potential to deflect attention away from the potential for large fleet-wide improvements in fuel economy.”

While these academic studies form just a corner of the literature on EVs, they nonetheless highlight the need for fresh and cautious thinking about blanket EV subsidies. Every dollar wasted on subsidies for wealthy and committed EV buyers is a dollar that could have been spent fighting climate change elsewhere.

As federal taxpayers, consumers should not be forced to bankroll billions of dollars’ worth of renewable waste.

This was published in The Economic Standard.

It has also been posted on The Medium.

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