California politicians have been tasked (paywall) by executive order with the herculean job of getting 5 million new electric cars on the road by 2030, 14 times more than are there today. The big question is how much it will cost. Based on a working paper (paywall) published by the National Bureau of Economic Research this month, lawmakers may not love the answer.
Two economists at the University of California-Davis answered the question by analyzing the Enhanced Fleet Modernization Program, which offers rebates for lower-income drivers in certain parts of California to trade in old polluting cars for cleaner vehicles or transit passes. Because the program has strict eligibility criteria for who qualifies as a “lower-income” buyer, co-authors Erich Muehlegger and David Rapson say it’s the first empirical trial to reveal how much incentives for electric vehicles (EV) affect the buying habits of low- to middle-income drivers, rather than the typical upper-crust demographic.
That gave them clear data on how much subsidies on EV buying habits affect the lower end of the market, a segment critical to hitting greenhouse-gas emission targets. The good news is that all of the subsidies go into buyers’ pockets, and a few thousand dollars can have a big effect: a 10% reduction in price increased demand in the target demographic by 39%.
The bad news is that scaling up the program to reach California’s goals—to put 1.5 million electric cars on its roads by 2025, and 5 million by 2030—could cost $9 billion to $14 billion over the next decade. The high end of that estimate is equivalent to about 10% of the state’s general fund (although the clean car program draws on separate climate funds, not general tax revenue).
Muehlegger and Rapson say their study isn’t meant to warn California off its ambitions. Instead, they want politicians to consider the most cost-effective way to achieve their goal. First, understanding what it takes to get car owners out of their gas guzzlers and into EVs is key.
The Golden State will almost certainly be the first state to electrify the majority of its vehicles. EVs sold in California already account for about 10% of the state’s car sales (and 50% of all those sold in the US). It must do this to meet its target to make the economy carbon neutral by 2045. The main problem is cars, the source of 41% of the state’s greenhouse gasses.
The power sector began phasing out fossil fuels years ago in favor of wind, solar, and batteries as prices for renewables dropped. EV’s haven’t seen the same price decline. Rapson suggests two other options, if direct rebates become too expensive. One is a revenue-neutral “feebate” in which cleaner cars are subsidized with taxes on gas guzzlers. The second is a perennial favorite among economists: a carbon tax. “Why not place a significant price on carbon that reflects global warming damages,” Rapson writes, and let the market invest in the cheapest way to solve it.
“A high carbon tax would be very effective at reducing carbon, but it’s politically untenable,” says Daniel Sperling, director of the Institute of Transportation Studies at Davis. That’s why, he says, California is instead expanding a number of market-based funding sources already bringing in billions of dollars.
The first is the state’s cap-and-trade system, the fourth largest in the world. The system caps emissions from about 450 businesses—mostly large electric power plants, industrial plants, and oil-and-gas companies—that are responsible for most of California’s greenhouse gasses. Firms must buy credits each year for any emissions over the limit. After a slow start, sales from the program now bring in nearly $700 million per quarter.
That revenue is used to fund California’s Clean Vehicle Rebate Project, which has handed out roughly $850 million in rebates for 270,000 vehicles (including battery electric, plug-hybrids, and zero-emission vehicles such as fuel cell vehicles) since 2010, according to the California Air Resources Board (CARB). The BOARD is considering whether to allocate another $3 billion of funds from cap-and-trade to these sorts of rebates (paywall).
In addition, Sperling notes, the US government gives all EV buyers a $7,500 tax credit for each car. The the tax break currently phases out after manufacturers sell more than 200,000 EVs — a threshold Tesla exceeded this year, and GM and Nissan are nearing—but that may be extended.
A third pot of money is available as well: the Low Carbon Fuel Standard (LCFS) credits. Established by then-governor Arnold Schwarzenegger in 2007, the LCFS requires companies to reduce the carbon intensity of their fuel, and buy credits if they do not. Electric utilities that have built out solar and wind generation now earn billions of dollars’ worth of credits they can sell to oil and gas companies. By law, they must plow that money back into EV rebates (conveniently for them, those cars make for a new source of electricity demand). One bill now coming together in California’s capitol of Sacramento could deliver a third rebate for EV buyers: a $2,000 or more check cut right at car dealerships drawing on utilities’ LCFS windfall.
Until now, passion, not price, has propped up the EV market. Early adopters flocked to cars like the GM’s EV1, the Toyota Prius, Nissan Leaf, and now Tesla’s lineup, the Model S, X, and 3. But they still make up less than 1% of the US car market. Price sensitivity (or as economists call it, the elasticity of demand) is still the deciding factor for the vast majority of people deciding between, say, an all-electric Chevy Bolt ($37,000) or a conventional Chevy Cruze hatchback ($18,000).
Georgia shows the nature of the challenge. After legislators eliminated the state’s $5,000 EV tax credit in 2015 (paywall), EV sales dropped off a cliff. The state’s share of national EV sales fell from 17% of the US total in 2014 to 2% in 2016. California doesn’t want to repeat that mistake.
The state may be in luck. Hundreds of all-electric and hybrid models will arrive by 2020. Porsche, Jaguar, BMW, Mercedes-Benz, Ford, and GM are now racing to catch up with Tesla.
Prices remain high. The median price for popular EVs today is around $38,000 compared to about $34,000 for all passenger cars. Tesla’s $35,000 Model 3, designed in theory for mass appeal, is months (or more) away as the company builds higher-end versions to stay solvent. Yet there are some signs EV prices are dropping. Hyundai will sell a 258-mile-range Kona for just $23,000 next year. Automakers are driving down costs through economies of scale.
As it stands, California’s EV goals could prove unaffordable. A few things may need to break in its favor: a revival of the federal tax credit for all manufacturers, rising income from California’s climate programs, and prices for EVs falling faster than expected. A surprise drop in prices happened once before for the wind and solar industry. With automakers investing more than $90 billion to electrify their industry, it could happen again for EVs.