CBO Releases a Study on the Effects of Federal Tax Credits for the Purchase of Electric Vehicles

September 20, 2012

CBO estimates that federal policies to promote the manufacture and purchase of electric vehicles (including some policies that support other types of fuel-efficient vehicles) will have a total budgetary cost of about $7.5 billion through 2019. Tax credits for buying electric vehicles—which account for about one-fourth of that budgetary cost—are likely to have the greatest impact on vehicle sales.

Today CBO released a study on the effects of federal tax credits for the purchase of electric vehicles. CBO finds that:

  • At current vehicle and energy prices, the lifetime costs to consumers of an electric vehicle are generally higher than those of a conventional vehicle or traditional hybrid vehicle of similar size and performance, even with the tax credits, which can be as much as $7,500 per vehicle. That conclusion takes into account both the higher purchase price of an electric vehicle and the lower fuel costs over the vehicle’s life.
  • The direct effect of the credits is to subsidize purchases of electric vehicles—including purchases that would have been made even without the credits. Those people who purchase electric vehicles because of the tax credit use less gasoline and produce fewer emissions of greenhouse gases than would otherwise be the case. The cost to the government of those direct reductions is somewhat higher than the comparable costs of other policies aimed at the transportation sector.
  • However, the tax credits have other, indirect effects: Increased sales of electric vehicles allow automakers to sell more low-fuel-economy vehicles and still comply with the federal standards that govern the average fuel economy of the vehicles they sell (known as CAFE standards). Consequently, the credits will have little or no impact on the total gasoline use and greenhouse gas emissions of the nation’s vehicle fleet over the next several years.
  • Over the longer term, the tax credits can affect total gasoline consumption and emissions if future revisions to CAFE standards are influenced by current sales of electric vehicles and expectations about future sales. Moreover, if the credits play an important role in helping the U.S. electric vehicle industry become self-sustaining, their effect on vehicle sales might continue to affect CAFE standards—and the resulting amounts of gasoline use and emissions—for many years after the tax credits themselves have run out.

This study was prepared by Ron Gecan of CBO’s Microeconomic Studies Division.