By Chris Ross, Executive Professor, C.T. Bauer College of Business, University of Houston
The recently issued House GOP tax overhaul bill proposes to eliminate the $7,500 federal tax credit for battery electric vehicle (BEV) purchases. This subsidy was introduced in 2012 and applies only to the first 200,000 BEVs sold by each manufacturer.
A smaller tax rebate has been available for plug-in hybrid electric vehicles, or PHEVs, since 2016. In California, BEV manufacturers can also benefit from sales of clean air credits through the sale of zero emission vehicles, funded by manufacturers who sell the internal combustion engine vehicles that most people choose to drive.
These tax credits and other benefits are generally intended to reduce greenhouse gases and on-road emissions of toxic pollutants in urban areas. There is a widespread belief that BEVs represent the future and will steadily displace internal-combustion-powered vehicles in the global vehicle fleet.
BEV advocates worry that cutting the subsidies will slow the growth of electric vehicles. But the reality is more complex.
As important as tax rebates in promoting BEVs is the aggressive Corporate Average Fuel Efficiency (CAFE) standards imposed by the Obama administration in 2012 as a measure to “reduce our dependence on foreign oil,” as well as reduce emissions. This will require manufacturers’ sales of cars and light trucks to average 54.5 mpg in model year 2025, up from a mandated 35.5 mpg for model year 2017. The standards and their penalties are under review by the Trump administration, and in July 2017 the National Highway Traffic Safety Administration (NHTSA) of the Department of Transportation filed in the Federal Register:
“NHTSA seeks comment on whether and how to amend the civil penalty rate for violations of Corporate Average Fuel Economy (CAFE) standards. NHTSA initially raised the civil penalty rate for CAFE standard violations for inflation in 2016, but upon further consideration, NHTSA believes that obtaining additional public input on how to proceed with CAFE civil penalties in the future will be helpful.”
There is a lot to like about BEVs. Neighbors of mine both recently retired after long careers as engineers for major oil companies and immediately acquired a Tesla Model S. They are enraptured with its design, extraordinary torque and technological sophistication. Doubtless, the tax credit helped them decide; there is gratification beyond economics in receiving money from, rather than sending it to, the IRS. But the Tesla Model S probably would have competed well with conventional vehicles in the luxury car niche even without the tax credit.
The tax credit is more important outside the luxury niche, but the CAFE standards may be more important still. A Bloomberg report estimated that GM was selling its Bolt BEV at a loss of $8,000 or $9,000 per vehicle, presumably hoping to recover the costs through lower penalties from failing to meet increasingly stringent CAFE standards. In this case the costs are being borne ultimately by GM’s shareholders. If the CAFE standards are relaxed and penalties reduced, GM may have to answer questions from shareholders on whether this was a wise use of resources.
The answer will probably be yes, on the grounds that battery costs are declining such that the BEV niche may expand beyond the luxury sector. Nevertheless, there remain barriers to BEV penetration rates:
- Range anxiety: The Chevy Bolt takes about 10 hours to fully recharge from empty to its full range of 238 miles at a home 24 Volt/32 Amp charging unit in your garage; there are a limited number of publicly available DC power fast-charging stations to top up. This suggests that the Bolt would be best suited for commuting or short trips, which limits its functionality.
- Full cycle cost: The Bolt received very positive reviews but remains expensive for a small hatchback when fully equipped, relative to its internal combustion engine competitors. It would be economically more attractive if gasoline prices increase while the price of natural gas – which in many areas is the marginal source of the electricity that powers these vehicles — stays low. Thus, BEVs will be most competitive where gasoline is highly taxed and power is relatively inexpensive.
- Social costs: Cobalt, which is required to stabilize lithium ion batteries, is largely found in parts of the Congo renowned for human rights violations and abusive workforce practices.
- Battery recycling: As BEVs penetrate the vehicle fleet and batteries wear out, a new industry will be required to recycle the spent batteries and separate the component materials.
These barriers will put brakes on the penetration rate of BEVs.
There will doubtless be an angry response to the GOP proposal, but its effect will be minimal. Tesla will likely reach the 200,000 battery electric vehicle mark in early 2018, followed quickly by GM and Nissan, so killing the rebate this year will only slightly advance the schedule for eliminating the tax credit.
There is also an issue of equity. The $7,500 tax rebate is most valuable to high income people, but it is paid for by the rest of us in a reverse Robin Hood move of robbing the poor to give to the rich. Eliminating it will rob the rich of this perk, and the money saved can be put to more fruitful and equitable uses.
Hopefully the administration will seek out other situations that are regressive, where high-cost energy solutions favored by the rich are paid for by spreading the costs over rich and poor alike.
Chris Ross is an Executive Professor of Finance at the C.T. Bauer College of Business and the University of Houston, where he teaches classes on strategies in the oil and gas industry. He also leads research classes investigating how different energy industry segments are creating value for shareholders. He served on the Program Committee of the Offshore Technology Conference as Chair of the Marine Technology Society OTC Sub-Committee from 2008-13, when he was also Co-Chair of the Energy Policy Sub-Committee of the Greater Houston Partnership’s Energy Collaborative. From 2012-15, he served as Board Chairman of the River Oaks Chamber Orchestra and remains on the Board and the Executive Committee.