CBO Discusses the Effects of Tax Credits for Electric Vehicles at Energy Conference

June 24, 2013

Recently, I spoke at the 2013 EIA Energy Conference, hosted by the U.S. Energy Information Administration of the Department of Energy. My presentation—which can be viewed below—focused on CBO’s report Effects of Federal Tax Credits for the Purchase of Electric Vehicles, which was released last September.

The federal government provides tax credits to buyers on each purchase of new plug-in hybrid vehicles (electric vehicles with an externally rechargeable battery that are powered, in part, by gasoline) or all-electric vehicles (electric vehicles that run entirely on battery power). My presentation summarized how those credits compare to the total lifetime cost of purchasing and operating electric vehicles and to the potential reductions in gasoline use and greenhouse gas emissions from driving them.

At current vehicle and energy prices, the lifetime costs to consumers of an electric vehicle are generally higher than those of a conventional 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 additional tax credit that would be required for electric vehicles to be cost-competitive with other vehicle options is smaller for electric vehicles that have small batteries or that are substituting for vehicles with low fuel economy.

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 reductions in gasoline consumption and emissions can vary widely.

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 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. As a result, the cost per gallon or per metric ton of any such reductions will be much greater than the cost calculated on the basis of the direct effects alone. However, over the longer term, the tax credit can affect total gasoline consumption and emissions if future revisions to CAFE standards are influenced by current sales of electric vehicle and expectations about future sales.

Ron Gecan is an analyst in CBO’s Microeconomic Studies Division.