Electric Vehicle Tax Credit Money Better Spent on Battery Development

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Last week, the nonpartisan Congressional Budget Office (CBO) released a report analyzing the effectiveness of the Electric Vehicle tax credit and the results aren’t good. It concludes that the tax credit is unlikely to make electric cars affordable relative to conventional gas cars. But this finding shouldn’t be unexpected. America isn’t going to realize a completely electric transportation sector by subsidizing costly and low-performance first generation electric cars. Rather, America will switch to electric vehicles en masse once there are cheap and viable electric vehicle options to choose from, which requires significant innovation.

The tax credit provides a $7,500 credit to consumers that purchase an electric vehicle. On paper that seems like a significant incentive. But as the CBO summary of the report notes, plug-in hybrid electric vehicles and battery electric vehicles (also known as all-electric cars) require a tax credit of more than $12,000 at the very least “to have roughly the same lifetime costs as a comparable conventional or traditional hybrid vehicle…Consequently the credits will result in little or no reduction in the total gasoline use and greenhouse gas emissions of the nation’s vehicle fleet over the next several years.”

The high cost (and small tax incentive) of electric vehicles is not their only obstacle, as today’s electric vehicles simply do not meet consumer performance expectations. Just this week, Reuters reported that Toyota “has scrapped plans for widespread sales of a new all-electric minicar, saying it had misread the market and the ability of still-emerging battery technology to meet consumer demands.” Toyota Vice Chairman Takeshi Uchiyamada acutely observes, “The current capabilities of electric vehicles do not meet society’s needs, whether it may be the distance the cars can run, or the costs, or how it takes a long time to charge.” In fact, while gas cars can travel more than 300 miles between refueling – a process which only takes a few minutes – battery electric vehicles in the market today tend to have a range of less than 100 miles per charge and depending on the charging technology available, can take anywhere from half an hour to twenty hours to fully charge. And there can be no doubt that batteries are to blame for electric vehicles’ high price tags. In a 2012 forum on green technology, Ford CEO Alan Mulally lamentedthat the battery alone made up $12,000 to $15,000 of the cost of its electric Ford Focus, while a gasoline-powered Focus sells for $22,000 in its entirety. “So, you can see why the economics are what they are,” he noted.

Clearly, better and cheaper batteries are needed to drive – pun intended – electric vehicles to both cost and performance competitiveness with gas cars. Subsidizing existing, subpar technologies – such as through a higher tax credit – might make them more cost competitive, but it certainly will not adequately spur battery innovation for performance competitiveness. Some advocates of the tax credit point to increased Prius sales as an example of subsidies working. But the hybrid Prius also runs on gas, so its main obstacle to parity with gas cars has just been cost, not both cost and performance as in the case of battery electric vehicles.

As such, funds allocated for the federal electric vehicle tax credit – $2 billion from 2009 to 2019, according to the CBO – would be far better spent shoring up advanced battery R&D in government entities like ARAP-E’s Batteries for Electrical Energy Storage in Transportation (BEEST), the Vehicle Technologies Program within the Department of Energy’s Energy Efficiency and Renewable Energy Program, and the National Labs. Ultimately, robust support for innovation, and not subsidy policy, holds the promise that electric vehicles will one day be able to displace gas cars as the vehicle of choice for consumers around the world on their merits alone.

The above photo shows the interior of the Nissan Leaf – a battery electric vehicle – on display at the 2009 Tokyo Motor Show. Photo credit: Wikimedia Commons.

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About the author

Clifton Yin is a Clean Energy Policy Analyst at the Information Technology and Innovation Foundation. Prior to joining ITIF, he earned a Master of Public Policy degree with a focus on environmental and regulatory policy from the Georgetown Public Policy Institute. His master’s thesis sought to use statistical analysis to evaluate the effectiveness of California’s Renewable Portfolio Standard on encouraging in-state renewable energy generation. While a graduate student, Clifton served as a policy fellow at Americans for Energy Leadership and interned at the Environmental Defense Fund and the American Enterprise Institute.