A new analysis from Resources for the Future shows that subsidies for electric vehicles are more cost-effective and equitable if the subsidies are aimed at lower incomes. Although all types of subsidies modeled in the analysis end up benefiting lower-income households, the income-based subsidy benefits these households the most.
Plug-in electric vehicles (EVs), combined with a decarbonized electric power sector, may offer the best opportunity for dramatically reducing greenhouse gas emissions from US passenger vehicles and meeting the Biden administration’s climate objectives. After passing the infrastructure package—which includes billions of dollars in subsidies for public charging stations—Congress continues to deliberate over whether to increase subsidies for purchasing EVs in the Build Back Better Act. At the same time, many states (including California and New York) are considering whether to extend or increase their subsidies for EVs. Added to all this is a growing concern over the possibility that these types of subsidies may largely benefit high-income households.
In a new working paper, I analyze the cost-effectiveness of subsidizing EV buyers, and I ask whether a trade-off exists between equity and cost-effectiveness. If there’s no trade-off, then policymakers can design subsidies that are more effective than the current subsidies at boosting sales while favoring low-income buyers. The working paper integrates insights from a couple of my previous blog posts about EV subsidies, backed up with more rigorous modeling that allows me to consider how the subsidies affect vehicle prices and entry of new EVs into the market.
Some further background: Currently, the federal government offers tax credits of up to $7,500 to purchase a new EV. The credit begins to phase out for a manufacturer once the auto company exceeds 200,000 cumulative sales. Because of this threshold, GM and Tesla vehicles have become ineligible for the tax credit, and vehicles sold by several other manufacturers soon will be ineligible. The Build Back Better Act would eliminate this threshold and increase the maximum subsidy to $12,500 per vehicle, although the very highest-income consumers would get smaller subsidies.
Outside of the federal tax credit, other policies currently support EVs. Many states offer subsidies for purchasing EVs and for home charging systems. The federal standards for fuel economy and greenhouse gas emissions also incentivize EVs, because selling more EVs can help manufacturers comply with those standards. California and 12 other states implement the Zero Emission Vehicle (ZEV) program, which sets targets for the number of EVs sold in those states.
A complication is that different policymakers choose from each of these policies independently of one another. Congress chooses federal subsidies, state lawmakers choose state subsidies, and California regulators set the ZEV standards. Various federal agencies set standards for fuel economy and greenhouse gas emissions, and they’ve recently reversed the Trump administration’s efforts to weaken those standards.
Given this context, I take the perspective of a state or US legislator and examine EV purchase subsidies alongside all the other policies already in place—including the standards for ZEV, fuel economy, and greenhouse gas emissions. I consider the following options for designing a subsidy: offering the same subsidy to all consumers regardless of household income or vehicle price, aiming the subsidy at lower household incomes, or linking the subsidy to vehicle price.
I use a new version of the vehicle market model that we’ve developed at Resources for the Future (RFF) to compare the effectiveness of these subsidies and account for the interactions of the subsidies with the standards for ZEV, fuel economy, and greenhouse gas emissions. (This analysis is relevant over the next three to four years, when those standards will be fixed, whereas the standards for ZEV, fuel economy, and greenhouse gas emissions are likely to tighten in the late 2020s.)
My new working paper contains two important conclusions. First, the income-based subsidy is more cost-effective than the other subsidies that I consider by about 40 percent. A previous blog post I wrote about EV subsidies shares the same conclusion, but that analysis had been quick and dirty; it did not account for policy interactions nor the entry of new EVs to the market due to the subsidies.
The second important result is that the EV subsidies (even the uniform one that applies to all consumers) are progressive—meaning that the subsidies benefit low-income consumers more than high-income consumers. To see why, it’s important to keep in mind that what really matters is not who receives the subsidy payment (i.e., the check from the government), but rather how the subsidy affects vehicle prices. Suppose, hypothetically, that the government offers consumers $1,000 to buy a new environmentally friendly product. Manufacturers expect the subsidy to increase demand for the product, so they will raise the price. If manufacturers raise the price by $1,000, then the consumers are no better off than before the subsidy, and the manufacturers capture the entire subsidy. If, alternatively, manufacturers increase the price by $500, then manufacturers and consumers are splitting the subsidy in half.
According to my modeling, consumers who buy less expensive EVs capture the majority of the subsidy. In other words, the prices of less expensive EVs increase much less relative to the value of the subsidy. For consumers buying luxury EVs, prices increase by roughly the same amount as the subsidy. This means that manufacturers capture most of the subsidy and that buyers of luxury EVs capture little of these subsidies—these buyers also tend to have high income. (When I refer to low- or high-income households, I mean it relative to all new-vehicle buyers, not relative to the overall US population.) Note that these results hinge on model parameters that are estimated from real-world consumer responses to vehicle prices, and the results are consistent with the findings of another paper that models EV subsidies in California. All the subsidies that I’ve modeled are progressive, and the income-based subsidy is more progressive than others.
These conclusions also pertain to states that are considering whether to increase or extend their EV subsidies. Many states in the ZEV program subsidize EV purchases. My analysis suggests that these subsidies benefit low-income consumers more than high-income consumers, particularly if the subsidy is linked to household income. My results also suggest that linking the subsidy to the vehicle price is less effective and less equitable than linking the subsidy to household incomes.
This article also appears on the University of Maryland’s Transportation Economics and Policy Blog, which is supported in part by funding through the Maryland Transportation Institute.