Summary
- The Inflation Reduction Act subsidies for electric vehicles provide moderate climate benefits and help US firms at the expense of foreign auto manufacturers
- The IRA may be the largest climate change investment ever, with costs forecast at up to $1 trillion
- EV tax credits may cost US taxpayers $70 to $390 billion
- The leasing loophole allows leased EVs to qualify for subsidies regardless of trade restrictions
- The IRA EV credits generate meaningful benefits per taxpayer dollar, but many credits go to buyers who would have purchased an EV anyways
Article
The Inflation Reduction Act (IRA) has provisions for subsidies for electric vehicles (EVs) which offer moderate climate benefits and support US firms over foreign auto manufacturers. However, these subsidies are not considered a home run as they come at a significant cost to US taxpayers. The IRA is seen as a major investment in climate change, with potential costs reaching up to $1 trillion, and the EV tax credits alone may cost taxpayers between $70 to $390 billion. The impact of these subsidies on the vehicle market, differences in climate damages for various EV models, and the trade-offs between trade and the environment are all areas of focus in a new working paper.
The IRA provides income tax credits of up to $7,500 for new EVs, with certain eligibility requirements in terms of assembly location and supply chain content. However, the leasing loophole allows all leased EVs to qualify for subsidies regardless of these trade restrictions. The eligibility rules have undergone changes over time, impacting the purchase decisions of consumers. While the subsidies have little effect on purchase prices, they do result in increased leasing rates, particularly for foreign-assembled vehicles losing purchase subsidies due to trade restrictions.
A model of vehicle supply and demand is used to calculate the benefits generated by the EV credits, which amount to $1.87 in US consumer, producer, and environmental benefits for every dollar spent by the government. The subsidies have resulted in an increase of 90,000 EV sales per year, encouraging consumers to switch from gasoline vehicles to EVs. However, approximately three-fourths of the IRA EV credits went to taxpayers who would have purchased an EV regardless, leading to questions about the cost-effectiveness of the subsidies in achieving additional sales.
Measuring externalities for gasoline vehicles and EV models, it is found that including the global cost of climate change, the average EV generates $16,000 and the average gasoline vehicle generates $19,000 in lifetime social costs. However, when considering only domestic costs of climate change, EVs generate more external costs than gasoline vehicles due to their heavier weight leading to more expensive fatal accidents. The IRA does not incentivize purchases of cleaner and lighter EVs, resulting in a wide dispersion in lifetime externalities across models.
The IRA EV credits have created tensions in international trade, particularly with European firms feeling the impact of decreasing market share for foreign auto manufacturers. While the credits contribute to a decrease in CO2 emissions, benefiting foreign countries’ environment, they also have negative impacts on trade relationships. The leasing loophole, while circumventing trade restrictions, has modest climate benefits and mainly substitutes foreign for domestic EV purchases, harming US auto firms. In conclusion, the IRA EV credits generate meaningful benefits per taxpayer dollar but also have drawbacks such as benefiting buyers who would have purchased an EV anyways, negative US impacts from the leasing loophole, and missed opportunities to increase policy benefits by targeting cleaner EVs.
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