EV Tax Credits Crucial Tool for Limiting Climate Change

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Gasoline and diesel used by Americans cars and light trucks cause more than one billion metric tons of CO2 pollution every year, or about 17% of all U.S carbon pollution.  Because of the imperative of drastically reducing carbon pollution to avoid the worst impacts of climate change, electric vehicles have emerged as a key technology for cutting CO2 while retaining the convenience and mobility afforded by private vehicles.

Governments seeking to advance the shift from internal combustion engine (ICE) vehicles to electric vehicles have four main options.   They can (1) Do nothing and leave it to the “free market;” (2) Tax ICE cars and/or raise gas taxes; (3) Require automakers to sell a minimum percentage of EVs or stop selling new gasoline vehicles entirely; or (4) Subsidize EV sales through tax credits of similar mechanism.

Doing nothing leaves the growth of electric vehicles to the free market.  Given that electric vehicles have been on the market for fewer than 10 years, and rely on newly developed technologies and supply chains that do not fully benefit from economies of scale, their upfront cost is slightly higher than the cost of a comparable gas vehicle.  While certain consumers will purchase electric vehicles despite their higher cost to avoid carbon pollution or for their superior performance, the volume of unsubsidized sales will be significantly less than it would be with subsidy covering some of the cost gap between EVs and ICE cars.  The lower sales volumes will cause EV vehicle and charging infrastructure development to further lag and will disincentivize manufacturers from producing EVs, a result that perpetuates the ICE car status quo and their high levels of carbon pollution.  It is also important to note that oil enjoys billions in tax subsidies, in addition to the hundreds of billions of dollars spent each year by the Pentagon defending the oil-rich Persian Gulf region.

The second option to boost EV sales is to place significant taxes on ICE vehicles or gasoline to the point where EVs become more attractive.  This approach has been effectively employed in Norway, where EV sales now exceed 50% of all sales, and in China, where EV sales are growing fast.    Given Americans’ aversion towards taxes, this approach is probably politically unfeasible.

The third option is requiring automakers to sell a minimum percentage of EVs, or stop selling new gasoline vehicles.  This is the approach taken by California and nine other states that have imposed the Zero Emission Vehicles mandate credit system, which requires that roughly 2.5% of the cars sold by auto manufacturers in a state be zero emissions, a percentage which rises to 8% by 2025.  This approach has proven highly successful in California and other states representing 30% of all U.S. auto sales, and has spurred a proliferation of EV models.  Although automakers have strenuously resisted the ZEV mandate, its efficacy in spurring EV production suggests that the mandate approach, which does not require direct government funds to implement, may be a highly effective approach to advancing the transition to EVs.  China has adopted a modified version of the ZEV mandate.   Ten countries have announced plans to phase out sales of new ICE vehicles altogether by dates ranging from 2025 to 2040.

The final option is the EV tax credit or similar government subsidy.  The existing EV tax credit of up to $7500 per vehicle up to a ceiling of 200,000 EVs sold per manufacturer, has been successful in spurring EV growth, and helping overcome the challenges faced by EVs of higher upfront costs (for now), unfamiliar technology, and a still-developing charging network.   Tesla and General Motors, the leading U.S. manufacturers of EVs, have both sold more than 200,000 EVs, and therefore the tax credit for the best-selling EV models will soon terminate if it is not extended.  The Driving America Forward Act, introduced by a bipartisan coalition of Senators, seeks to extend a $7,000 tax credit until automakers have sold 400,000 additional EVs, and then taper down from there.

The EV tax credit is under attack by critics in Congress on the basis that the users of the tax credit tend to be higher income, and that the tax credit is therefore unfair and elitist.  This argument misses the point.  The EV tax credit exists to spur development of a deep and broad EV market capable of supplanting the unsustainable oil-powered status quo, not to reward higher-income buyers.    To the extent that higher-income buyers come forward to support the fledgling EV industry in partnership with the government, that is a positive that reduces governmental outlays to advance a much-needed technology, and grow the market for less expensive, used EVs

The “unfairness” arguments behind the repeal effort are just a smoke screen for those who want to maintain the petroleum status quo.  Sen. Barrasso and the other cosponsors of the bill to repeal the tax credit all voted for the highly regressive Trump tax cuts, and are all supported by the Koch Brothers, who are working vigorously to repeal the EV tax credits.

In sum, the EV tax credits are a crucial tool for displacing the planet-killing rule of the petroleum-powered car.For this reason, they should be maintained and exte