A new study sheds light on the complex outcomes of electric vehicle (EV) subsidies under the Inflation Reduction Act (IRA). While the subsidies have boosted EV sales, reduced emissions, and benefited U.S. automakers, a significant portion of the subsidies have gone to consumers who would have purchased EVs anyway. This raises questions about the cost-effectiveness of the policy and the trade-offs between environmental goals and domestic manufacturing. The study offers insights into the nuances of EV incentives and their broader economic and geopolitical implications. Electric vehicles, Inflation Reduction Act, Subsidies
IRA’s EV incentives -Balancing Climate and Costs
A new study has found the Inflation Reduction Act’s electric vehicle (EV) tax credits only to have a mixed effect. While these subsidies have resulted in lower emissions and higher profits for US automakers on one hand. However, the research also shows a large chunk of subsidies (about 75%) have flowed to consumers who would have bought EVs even if no incentives were offered.
This evidence has implications regarding the economic value of the policy. The study estimates that the government spends $32,000 to help sell each additional EV — a figure that might give pause to policymakers. “Although the electric vehicle tax credits authorized through the IRA are a relatively low-cost approach to reducing air pollution and curtailing climate change by inducing some automakers to produce alternative fuel vehicles in U.S. manufacturing plants, their costs to taxpayers are high,” co-author Hunt Allcott observes.
Boosting U.S. Manufacturing, Impacting Global Trade
The IRA’s ‘Buy American’ clauses, mandating that EVs be built in the Americas and come with components from the U.S. and allies, have achieved some success … This may have been good for the U.S. brands, since it kept foreign players out and pushed up EV sales, on paper at least. But they have also harmed U.S. allies who are losing sales to American manufactures.
Joseph Shapiro, an associate professor at UC-Berkeley and a co-author of the study, described it succinctly: “The IRA subsidies have served to promote vehicle electrification by constraining foreign competition. It is moving forward on the global climate policy and a backward step in global trade cooperation. The findings demonstrate how the challenge of domestic economic priorities complicates the larger need for international trade and cooperation.
Getting the most bang for your buck: Subsidizing Cleaner EVs
If shared by EV owners, the study underscores how much more effective the IRA’s EV subsidies could have been if they were directed to greener and far more environmentally-friendly electric vehicles. The specific model of car can also influence the degree of environmental benefits to be gained from switching from a hybrid to an EV, as the researchers discovered.
A Toyota Prius hybrid would be replaced by a Tesla Cybertruck electric vehicle, for example: although it helps Lam to drive cleaner-energy cars, the Cybertruck is dirtier than the Prius. The IRA could have cut emissions more if, in addition to the larger tax credits for a few of the cleanest EVs, it had created strong incentives to use taxpayers’ dollars on EVs with even lower emissions and thereby maximize the environmental benefits of their subsidy.
The authors give credit but note as well, “not a home run” The results also underline the importance of policymakers thinking about how EV subsidies are complex instruments which should be carefully designed to fit within wider climate and economic objectives.
