A team of economists has taken on a central component of the Inflation Reduction Act: the $7,500 tax credit for U.S.-made electric vehicles.
The challenge in evaluating it is that the policy has sometimes conflicting goals. One is getting people to buy electric vehicles to lower carbon emissions and slow climate change. The other is strengthening U.S. auto manufacturing by denying subsidies to foreign companies, even for better or cheaper electric vehicles.
That’s why totaling those pluses and minuses is complex, but overall the researchers found that Americans have seen a two-to-one return on their investment in the new electric vehicle subsidies. That includes environmental benefits, but mostly reflects a shift of profits to the United States. Before the climate law, tax credits were mainly used to buy foreign-made cars.
“What the I.R.A. did was swing the pendulum the other way, and heavily subsidized American carmakers,” said Felix Tintelnot, an associate professor of economics at Duke University who was a co-author of the paper.
Those benefits were undermined, however, by a loophole allowing dealers to apply the subsidy to leases of foreign-made electric vehicles. The provision sends profits to non-American companies, and since those foreign-made vehicles are on average heavier and less efficient, they impose more environmental and road-safety costs.
Also, the researchers estimated that for every additional electric vehicle the new tax credits put on the road, about three other electric vehicle buyers would have made the purchases even without a $7,500 credit. That dilutes the effectiveness of the subsidies, which are forecast to cost as much as $390 billion through 2031. “The I.R.A. was worth the money invested,” said Jonathan Smoke, the chief economist at Cox Automotive, which provided some of the data used in the analysis. “But in essence, my conclusion is that we could do better.”
The paper, which has not been peer-reviewed, was published on Monday by the National Bureau of Economic Research. Economists often circulate early-stage research that is relevant to policy debates for discussion and comment, and it is sometimes substantially revised.
Trade restrictions have been among the more debated parts of the Biden administration’s climate-oriented industrial policy. Focusing subsidies on U.S. companies helped gain enough political support to pass the law. But some environmentalists say it slowed progress on carbon emissions, and it irked America’s trading partners.
And there are more trade-offs: The leasing loophole, while a negative in the researchers’ cost-benefit model, may have averted retaliatory measures from European countries.
“Frankly, I think it highlights all the difficulties associated with subsidy-based policies that aren’t faced if you have something like a carbon price,” said Catherine Wolfram, an economics professor at the M.I.T. Sloan School of Management who reviewed the paper.
Dr. Wolfram was a climate and energy adviser at the Treasury Department while the climate law was under development. Her preferred approach — and that of most economists — has long been a tax on carbon, which she argues would reduce greenhouse gas emissions more efficiently.
But cars impose harms beyond carbon emissions, which the study’s authors tried to compile for hundreds of vehicle models. As it turns out, size matters.
First, using the Environmental Protection Agency’s “social cost of carbon” metric, they calculated the dollar cost of each model’s lifetime carbon emissions from both manufacturing and driving. On average, emissions by gas-powered vehicles impose 57 percent greater costs than electric vehicles.
The study then calculated harms from air pollution other than greenhouse gases — smog, for example. That’s where electric vehicles start to perform relatively poorly, since generating the electricity for them still creates pollution. Those harms will probably fade as more wind and solar energy comes online, but they are significant.
Finally, the authors added the road deaths associated with heavier cars. Batteries are heavy, so electric vehicles — especially the largest — are likelier to kill people in crashes.
Totaling these costs and then subtracting fiscal benefits through gas taxes and electricity bills, electric vehicles impose $16,003 in net harms, the authors said, while gas vehicles impose $19,239. But the range is wide, with the largest electric vehicles far outpacing many internal combustion cars. Take a large electric pickup truck like the Rivian, and the compact hybrid Toyota Prius, which is excluded from the tax credits.
“The harms imposed by the Rivian are three times the harms imposed by the Prius, in terms of air pollution and death from accidents,” said Hunt Allcott, a co-author and professor of global environmental policy at Stanford University. “But we are subsidizing the Rivian and not the Prius.”
Of course, getting people to switch to a smaller car can be as hard as getting them to switch to an electric one.
Elaine Buckberg, a senior fellow at the Salata Institute for Climate and Sustainability at Harvard University and former chief economist at General Motors, said she learned that consumers are fixed in their preferences.
“You’d have to encourage bringing down the size of both the internal combustion engine and the E.V. to get people to buy smaller E.V.s.,” Dr. Buckberg said. “Otherwise, they’re just going to stay with internal combustion engines for longer.”
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