Decarbonizing transportation is important for achieving climate goals. Electric school buses could help while also improving public health and student outcomes, but the high cost of buses may slow progress. What options can bring down these costs?
Electric school buses have gained popularity recently, with over 8,600 bus purchases already committed by school districts, the majority of which happened since 2021. The market for electric school buses in the United States is still nascent, however, as only about 4,000 buses have been deployed so far, representing less than 1 percent of all school buses on the road. Replacing gasoline-powered buses with electric buses is important, because phasing out diesel school buses will reduce exposure to tailpipe pollution.
A shift to electric buses could have important health benefits. For example, a 2011 study found that retrofitting diesel school buses to reduce their diesel emissions resulted in significant reductions in respiratory illnesses, for school children and beyond. Furthermore, exposure to traffic pollution has been found to negatively affect academic performance, leading to impacts on long-term social capital accumulation. Given that young children are exposed to diesel emissions from the buses that transport them to school, avoiding this tailpipe exposure can have long-lasting benefits on their brains, bodies, and future wages.
The federal government has made school bus electrification a major goal through policies such as the Clean School Bus Program funded through the Bipartisan Infrastructure Law and the Clean Heavy-Duty Vehicles Program in the Inflation Reduction Act. The Clean School Bus Program provides $5 billion between 2022 and 2026 to replace diesel school buses with an electric alternative through grants and rebates. Each school bus replaced could be eligible for up to $345,000 in federal funding to cover the purchase of both the vehicle and the charging station. Similarly, the program in the Inflation Reduction Act provides up to 100 percent of the cost of electrifying buses, including the incremental cost of the electric vehicles, the charging stations, training and workforce development, and technical assistance.
School buses, as opposed to other commercial fleets of heavy-duty vehicles, often are owned by nonprofit organizations such as school districts, which have limited budgets. The inherent financial constraints mean that major investments can be challenging. Given the high up-front cost of electrifying buses, many school districts would be unable to afford the switch without some sort of government support.
The Clean School Bus Program provides $5 billion between 2022 and 2026 to replace diesel school buses with an electric alternative through grants and rebates.
So, how expensive is it to electrify a school bus fleet? Just by looking at the cost of the vehicles themselves: very expensive.
To explore this question in more depth, I obtained data from the World Resources Institute, which collected publicly available state contracts for school bus purchases from 2019 to 2023. These data include information such as vehicle characteristics and contracted price. On first glance, electric school buses are significantly more expensive than their diesel counterparts. On average, the contracted price for an electric buses is almost $352,000—about three and a half times the price of diesel buses, which cost less than $100,000 on average. So, why are electric buses so much more expensive than their diesel alternatives?
Well, in July 2023, I asked a similar question with respect to commercial electric trucks. What I found was a price markup for electric trucks that exceeded the cost of the battery for most heavy-duty vehicles. However, the smallest heavy-duty vehicles, such as local delivery trucks, showed only marginal markups above the cost of the battery. Before evaluating the data from the World Resources Institute, my hypothesis was that the markup for school buses likewise would be small, because school buses also are on the smaller end of the heavy-duty spectrum. Boy, was I wrong!
To estimate the markup for school buses, I followed the approach I had taken with trucks. I regressed the vehicle price on an array of the following vehicle characteristics: manufacturer, fuel type (electric, diesel, propane, gasoline), seating capacity, bus type (as demonstrated in Figure 1), whether the vehicle has a lift, purchase year, and the type of purchase contract (purchasing cooperative or state contract). Furthermore, because bus type is a reliable indicator of vehicle size, I interacted the fuel type with the bus type, to allow the markup to vary by bus type.
Figure 1. Types of School Buses
Source: Government Accountability Office
My analysis shows that the price markups for electric school buses vastly exceed the implicit cost of the battery (Figure 2). Markups are ten to almost fifteen times the battery cost, depending on the assumption of the battery cost per kilowatt-hour and the type of school bus.
Figure 2. Price Differential and Battery Cost across School Bus Types
So, what is going on here? As I’ve discussed with respect to electric commercial trucks, the small number of existing manufacturers means that manufacturers can raise prices far above marginal cost. This manufacturer markup certainly is the case for the school bus market, where sales are heavily concentrated: 5 manufacturers account for over 85 percent of the sales in the data set that I evaluated.
Figure 3: Market Concentration among Manufacturing Companies
Furthermore, in markets where sales are very low, economies of scale haven’t been reached. As a result, prices tend to be high. Part of the reason for this pattern is that manufacturers need to pass some of the fixed costs of investing in new technologies through to the customers, so that manufacturing can stay profitable for the new industry. In the case of electric buses, sales have been very low, likely contributing to this upward price pressure.
Finally, when the buyer is price inelastic, the manufacturer has more ability to raise prices. In the case of a school district that is facing significant public pressure from parents, the public, and school boards to electrify, the district may not have the bargaining power to negotiate lower prices—even though the school district likely is budget constrained.
Another data set that can help shed more light on these issues includes orders made through the Clean School Bus Program; the World Resources Institute collected such data through Freedom of Information Act requests to the US Environmental Protection Agency. These data contain the prices for electric and propane buses only (the two fuels eligible for the program subsidy), so using the data set to estimate markups is not feasible. However, extremely high prices are common in this data set, with average prices exceeding $370,000. These prices vary by state (Figure 4), with average prices in Nevada hitting $500,000.
Figure 4: Average Purchase Price of Electric School Buses for Recipients in the Clean School Bus Program, across US States
Unfortunately, subsidies from the federal government may exacerbate some of these issues. When a school district is eligible for subsidies that cover the entirety of the incremental cost, schools then become able to afford any price differential that a manufacturer puts on the vehicles, because ultimately, the government will shoulder those costs. And these subsidies are heavily relied upon for vehicle purchasing: 80 percent of all school buses procured in 2023 received a subsidy from the Clean School Bus Program.
From the perspective of a school district, higher prices for electric buses isn’t a huge problem when the schools have access to significant government subsidies—their final budget looks the same, regardless of the markup. However, from a societal perspective, these subsidies amount to a direct transfer of money from taxpayers to vehicle manufacturers. On the one hand, perhaps taxpayers should be willing to pay at least part of these costs; school bus electrification has the external benefits of reducing greenhouse gas emissions and local air pollutants that affect not just schoolchildren but everyone, particularly those in close proximity to bus routes. On the other hand, the financial costs may be high from an efficiency standpoint: taxpayers may be overpaying for these environmental benefits. But the exercise is not straightforward to fully quantify the benefits of school bus electrification in the early years, particularly as manufacturers may reinvest the profits into electrification, which can help keep costs down in the long run and lead to greater vehicle innovation.
The question becomes: Can these subsidies be designed to avoid exacerbating the massive markups, or better yet, to help reduce the markups? One way could be to reduce the amount that the government pays; for example, to pay for only a certain percentage of the cost differential. However, this solution would mean that school districts would have less support to electrify their buses and likely keep less well-resourced schools from electrifying their fleets. Another option could be to provide subsidies only for school districts that are most in need, rather than allow for any school district to be subsidized. This solution could reduce the upward pressure on the markup: because only certain school districts would be eligible for the subsidy, the nonsubsidized school districts wouldn’t have as much ability to pay for massive cost differentials, so manufacturers would have to restrict markups in order to continue selling vehicles. Though the Clean School Bus Program currently works to prioritize school districts in disadvantaged communities, it does not prevent school districts with more resources from receiving funds.
The government also could explore other types of subsidies, such as credits that subsidize research and development and up-front investment costs by manufacturers, so that bus prices can better reflect marginal costs rather than the fixed costs of investing in electric school buses. Subsidies that require technology or knowledge sharing also can help socialize the learnings across vehicle manufacturers, further fueling reductions in prices. Finally, subsidies that encourage entry into the market by new manufacturers can provide more competition, which ultimately would exert downward pressure on prices as manufacturers compete for sales by offering lower prices.
A more in-depth and robust analysis that explores the impact of different subsidies on school bus markups would be a worthy research endeavor. That analysis also would help answer the question of how best to structure subsidies so that they lead to less inefficiency and waste of public funds. The growing electric school bus industry will likely require subsidies to achieve economies of scale and reduce costs; identifying effective approaches to reducing the societal costs of that objective is still a worthy goal.
