Effects of Federal Tax Credits for the Purchase of Electric Vehicles

CBO estimates that federal policies to promote the manufacture and purchase of electric vehicles, some of which also 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 cost—are likely to have the greatest impact on vehicle sales. The electric vehicles that are the focus of this study fall into two broad classes:

• Plug-in hybrid vehicles are powered by an internal combustion engine, which runs on gasoline or other liquid fuels, and by an electric motor, which is powered in part by an externally rechargeable battery. 
• All-electric vehicles, also known as battery electric vehicles, run entirely on battery power.

Do the Federal Tax Credits Make Electric Vehicles Cost-Competitive?

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. For example, an average plug-in hybrid vehicle with a battery capacity of 16 kilowatt-hours would be eligible for the maximum tax credit. However, that vehicle would require a tax credit of more than $12,000 to have roughly the same lifetime costs as a comparable conventional or traditional hybrid vehicle.

Assuming that everything else is equal, the larger an electric vehicle’s battery capacity, the greater its cost disadvantage relative to conventional vehicles—and thus the larger the tax credit needed to make it cost-competitive.

What Is the Cost to the Government of Reducing Gasoline Use and Emissions by Providing Tax Credits for Electric Vehicles?

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 (see the table below).

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.

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.

How Do the Tax Credits Compare with Other Recent Subsidy Programs in the Transportation Sector?

The table below shows how recent subsidy programs compare with the one for electric vehicles:

Recent Subsidy Programs in the Transportation Sector and Their Effects on Reducing Gasoline Use and Greenhouse Gas Emissions

What Are Some Possible Approaches for Future Policies?

Changing the size of the tax credits would affect the cost of the credits to the government, but would have little, if any, effect on gasoline use or emissions over the short term, because automakers would still have to meet existing CAFE standards. Increases or moderate reductions in the number of credits available would probably have little near-term impact on either the government’s costs or the credits’ benefits to society. However, changes in the size or number of the credits could affect future CAFE standards by influencing regulators’ expectations about future sales of electric vehicles. The extent of such influence would be difficult to predict, however, as would the long-term costs and benefits of such changes.

Another option is to increase the federal excise tax on sales of gasoline, which would tend to reduce gasoline use and emissions. Other policies, such as a tax on the carbon content of fossil fuels, could focus on low-cost reductions in emissions outside the transportation sector. They would tend to minimize the total cost of achieving a given reduction in emissions, but they would not specifically target gasoline or oil consumption and would probably have little effect on the development of the electric vehicle industry.