Blog Post

Consumer Subsidies Are Not the Only Subsidies for EVs

In this series of blog posts, RFF researchers Virginia D. McConnell and Joshua Linn take a look at the current state of the electric vehicles (EVs) and the effect of current and future policies on the market. Click to read the first, second, third, and fifth installments.

Subsidies to consumers that we discussed in the previous blog ("Can Electric Vehicles Compete on Price?) are substantial and come in a number of forms including tax credits, free electric charging and HOV lane access. These are not the only subsidies for EVs however. There are also indirect sales and production subsidies that are evolving out of new policies to reduce greenhouse gases (GHGs).

Federal fuel economy regulations, the so-called reformed Corporate Average Fuel Economy (CAFE) standards, have recently been revised in a two-stage process affecting vehicles for model years 2012 to 2025. These standards require increasing average fuel economy from vehicles sold by all manufacturers, and they also require reductions in GHG emissions for the first time. Average fuel economy will almost double from its current levels by 2025, and GHG emissions must fall by more than 40% over the same period.

The GHG provisions of the new rules established by the EPA give special status to EVs in several ways. First, miles driven on an electric charge are counted as zero emissions (thereby disregarding upstream GHG emissions that occur at power plants where the electricity is generated). This provision makes EVs more appealing to manufacturers as a way to comply with standards. More EVs in a manufacturer’s fleet means less reduction in GHGs is needed from other vehicles.

Another provision of the new federal CAFE rules that will have a similar effect for EVs is that there is a “credit multiplier” for electric vehicles for MYs 2017-2021. For example, an all- electric vehicle will count as 2 vehicles in 2017, though the amount of the credit will decline over time. This will also mean that increasing the number of EVs produced and sold will lower a manufacturer’s costs of meeting the standard.

How large are these subsidies for EVs? It is not clear yet how much either of these subsidies to manufacturers will be worth since they depend on the future costs of reducing emissions from traditional vehicles that EV manufacturers will avoid—that is, the size of the subsidy depends on how costly the standards will be to meet in the future. But some simple calculations suggest that the implicit subsidies may amount to a couple thousand dollars per vehicle within the next 5 years.

Another significant regulation that provides subsidies for EVs is the co-called “ZEV mandate,” which originated in California and has been adopted by 10 other states. Under the mandate, a set percentage of vehicles sold by large automakers (over 60,000 vehicles a year sold in a participating state) must be zero emission vehicles (ZEVs). All-electrics and fuel cell vehicles qualify, with PHEVs given partial credit based on their estimated all-electric miles driven. The required ZEV percentage started small in 2012, but must reach 15.4% by the 2025 model year. A credit market allows automakers to buy and sell ZEV credits that can be used instead of actual ZEV sales. This allows firms that exceed the required share of ZEVs to receive further subsidies. For example, in the first quarter of 2013, Tesla sold $68 million worth of credits to other automakers in California, which is $13,600 for each of the 5,000 cars it sold in the quarter. This provides a sizable additional subsidy for sales of electrics in states where the ZEV mandate is in place.

These incentives to produce EVs under the new CAFE and ZEV rules are not the only subsidies on the manufacturing side.  There are also subsidies for manufacturing batteries for EVs and for basic research in battery development.  For example, the federal government has supported investment in electric battery production facilities with over $2 billion in subsidies, and spends nearly $80 million a year for electric battery research and development. Another subsidy that effectively increases the demand for electric vehicles are certain federal and state requirements that a certain share of both public and private fleet vehicles must be alternative fuel vehicles such as EVs.

While these subsidies are likely to have significant effects on EV technology development and adoption, it is difficult to estimate the implied average subsidy per vehicle.  Fleet mandates for EVs vary a great deal by geographic region, and the effect of R&D subsidies would need to be captured by vehicle production over many years.

In summary, total subsidies for electric vehicles—those to consumers to induce them to buy EVs, and those to manufacturers to induce them to produce and sell EVs—are large. Direct subsidies to consumers can be $9,500 per vehicle (or more in some states), implicit subsidies to manufacturers under CAFE rules are roughly a couple thousand per vehicle, and there are many other subsidies that are very hard to quantify on a per-vehicle basis but which nonetheless create very strong incentives. We next turn to what might justify such subsidies.