VOL. 18  ISSUE NO. 39   |  SEPTEMBER 26 – OCTOBER 2, 2012


CBO says electric car subsidies must double to be cost-competitive

‘But even if electricity were free, the tax credits would still need to be about twice as high as the current ones …’
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WASHINGTON – The Congressional Budget Office (CBO) released a report titled: “Effects of Federal Tax Credits for the Purchase of Electric Vehicles,” in which it concluded “the lifetime costs to consumers of an electric vehicle are generally higher than that of a conventional vehicle or traditional hybrid vehicle of similar size and performance, even with tax credits, which can be as much as $7,500 per vehicle.”

electric vehiclesUsing current vehicle and energy prices, the CBO concluded the average plug-in hybrid vehicle with a battery capacity of 16 kilowatt-hours would require a subsidy of more than $12,000 to have roughly the same lifetime costs as a comparable conventional or traditional hybrid vehicle.

And, assuming everything else is equal, the larger an electric vehicle’s battery capacity, the greater its cost disadvantage and requirement for a larger tax credit to make it cost-competitive.

While electric vehicles aren’t new – General Motors introduced the EV1 for lease in the 1990s – automakers introduced a new generation of electric vehicles in late 2010.

And, of the U.S. sales of more than 15 million light-duty vehicles since that time, only 40,000 are electric, despite federal tax credits ranging from $2,500 to $7,500 as incentives.

The tax credit begins at $2,500 for an electric vehicle with a 4 kWh battery and increases by $417 for every additional kWh of capacity, up to a maximum of $7,500.

Although the tax credit is subtracted from the amount of federal income tax the buyer owes, it is not a refundable credit, whereas the buyer will not receive the difference as a refund if the tax credit exceeds their tax liability.

So, people with little income tax liability may only receive a fraction of the credit.

The current tax credit applies to the first 200,000 electric vehicles sold by each manufacturer for use in the United States, after which time the credit will be phased out.

According to the CBO, providing federal aid to manufacturers of electric vehicles could lower the price of the vehicles, but not as much as the tax credits.

So far, most other programs supporting electric vehicles appear to have had little to no effect on the demand for such vehicles.

The CBO report acknowledges, “For electric vehicles to achieve the aims that supporters have for them—such as decreasing gasoline consumption, reducing emissions of greenhouse gases, and strengthening the U.S. automobile industry—consumers must buy those vehicles.”

The report makes it clear that a larger tax credit would be required to make electric vehicles cost-competitive with higher-fuel-economy conventional vehicles unless the cost of electricity goes down or gas prices go up.

And, of the two, the CBO states “gasoline prices have more potential to narrow the cost gap,” stating, “With gasoline prices of $6 a gallon, for example, the lifetime costs of many types of electric vehicles would be less than or equal to the costs of conventional vehicles, given the current tax credits … But even if electricity were free, the tax credits would still need to be about twice as high as the current ones, in many cases, before electric vehicles would be cost-competitive.”

Under the current tax credit scheme, the CBO points out it would require a gasoline price of no more than $6 per gallon to equalize the cost of a conventional light-duty truck and an equivalent electric vehicle, while it would require a gas price as high as $10 per gallon to equalize the cost of a conventional compact car and an equivalent electric vehicle.

CBO’s analysis, while noting gasoline powered vehicles contribute to “35 percent of nation’s carbon dioxide emissions attributed to human activity” came to the following two conclusions about “the effectiveness of the tax credits for electric vehicles in advancing those energy and environmental goals:”

• In the short term, the tax credits are likely to have little or no impact on total gasoline consumption and greenhouse gas emissions.

• In the long term, the credits might decrease gasoline use and emissions, but how cost-effectively they would do so is unknown.

When discussing the cost of reducing emissions, the report indicates the cost will be far lower if the electric power is produced from low-carbon sources, such as nuclear and hydroelectric.

The report asserts there is much uncertainty as to whether tax credits and other federal subsidies will have any lasting effects because the possibility exists electric vehicles may never achieve significant consumer acceptance, and states, “Federal incentives will clearly not have achieved the goal of helping to bring about the widespread use of electric vehicles if those vehicles never attain a significant share of the U.S. automobile market.”

While traditional hybrids have been available for about 10 years and have been eligible for federal tax credits during much of that time, they account for less than 3 percent of new vehicle sales.

The CBO report states unless consumers embrace electric vehicles in the years ahead, sales of electric vehicles will probably be no greater than sales of traditional hybrids because of their high purchase price and lengthy recharging times.

The report then recommends raising taxes on gasoline, which currently average $.49 per gallon (including federal, state and local taxes) as an option, which it says would have an immediate effect on fuel use and greenhouse gas emissions, claiming consumers would drive less in vehicles they already own.

In the alternative, it said the government could introduce policies that apply to multiple sectors of the economy rather than focusing only on transportation for the purpose of reducing emissions and proposed, as another option, a cap-and-trade program to minimize the total cost of achieving a given reduction in emissions.

The CBO report also recognizes price isn’t the only factor considered when consumers are faced with whether or not to purchase an electric vehicle, pointing out the benefit of owning one is dependent upon how many are on the road, as continued low sales provides little incentive to spur development of commercial-grade, high-speed recharging infrastructure.

Consumers may also be uncomfortable with the mileage limitations imposed, hampering their ability to drive longer distances, which is further compounded by lengthy recharging times.

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