Regulating the U.S. Electric Vehicle market
July 09, 2014
Author: George Brighten, C’14
In the past decade, the price of oil and its carbon footprint have increased at an alarming rate. This growth is environmentally unsustainable. Enter electric vehicles (EV). Plug-in electric vehicle (PEV) is an umbrella term that includes all-electric EVs, which use a battery as the sole power source and have a quoted range of 80-120 miles, and plug-in hybrids, which use both electricity and fossil fuels as power sources and have a quoted range similar to fossil fuel powered vehicles. PEVs create carbon emissions savings because they are more efficient than their carbon-fuelled counterparts and the electricity they run on can be generated from low-carbon sources. Consequently, companies that make these cars create significant positive externalities in reducing greenhouse gas emissions, local air pollution and the U.S’s dependence on oil. Electric vehicles can be powered by electricity generated using domestic renewable and natural gas resources, which have recently seen huge falls in price. This sector has grown since the turn of the century, as Nissan, Toyota, General Motors, and smaller companies like Tesla have entered the market. The graphic below analyzes the demographics of this sector.
Source: Wall Street Journal
At least in terms of environmental sustainability, the continued growth of the PEV market is desirable. However, there are a number of limiting factors in the long-term. For instance, manufacturers are investing in PEVs conservatively due to slow growth and low sales volume. On the demand-side, the initial cost, limited range and reliability are deterring consumers from adopting the technology more rapidly. Market forces alone will not consolidate and sustain the growth of the PEV sector, so the government must intervene and take supply- and demand-side policy actions. Auto executives share this view. In a survey by Booz & Company, a consultancy, auto executives expected that PEVs would have a 5% market share by 2020 without government intervention but at least a 10% market share by 2020 with government intervention (Carnegie, 10).
The current regulatory environment
In the past decade, the U.S. government has experimented with a number of policy actions, including vehicle fuel economy standards with provisions for PEVs, consumer tax credits, government manufacturing subsidies, and grants for recharging facilities and research and development. On the supply-side, until the program reached its funding cap in 2009, the government provided direct loans to advanced battery manufacturers to the value of 30% of the cost to build, renovate or expand manufacturing facilities (Carnegie, 5). Smaller, more specialized electric car companies like Tesla receive government subsidies to help finance their manufacturing operations (Stanford, 4). Consumers are eligible for a tax credit of $2,500 per vehicle with a 4 kWh battery and up to $7,500 per vehicle with a 16 kWh battery (Carnegie, 6).
These policy actions are a good start, but are unlikely to cradle the development of the PEV sector under conditions of austerity, consumer skepticism and manufacturer conservatism. Indeed, the budgetary constraints of the U.S government are reducing support for expensive tax credits and subsidies. New revenue sources that can finance these policies must be found. Even though the U.S. is at the tail end of the Great Recession and PEVs offer long-term savings on fuel costs, the relatively high initial cost of battery technology is still prohibitive for the majority of car consumers. This cost is expected to fall due to economies of scale, but a fairly precipitous fall is required for PEVs to achieve parity in price with standard combustion engine vehicles. Moreover, many consumers suffer from ‘range anxiety’ when it comes to PEVs, and greater, more visible investment in recharging infrastructure is required. In the case of manufacturers, the new vehicle fuel economy and greenhouse gas performance standards – that fuel efficiency must double by 2025 – are not stringent enough to drive investment in PEVs. Most auto manufacturers will meet these standards by making their existing combustion engine models more efficient (Carnegie, 6). Finally, the austere budget conditions of government create uncertainty about future support for the industry and disincline manufacturers from making large investments in PEVs (Carnegie, 11).
In the coming decade and beyond, the U.S government must redesign its regulatory program in order to provide greater incentives to PEV manufacturers and consumers, to capitalize on and extend past state-level efforts, and to guide utilities towards a more efficient electricity pricing system. Without these policy actions, electric vehicle sales face stagnation.
First, support for industry must be reconsidered. The government should maintain and, when fiscal conditions permit, expand the grants and loans that it provides to industry to stimulate production, and to academic institutions to incentivize research and development. Second, policies that target PEV consumers should also be tweaked. Among the main barriers to greater market penetration of PEVs are high initial costs and limited range. Solving these two problems simultaneously will prove challenging: increasing range requires a larger battery, which significantly increases a PEV’s cost. The U.S. government could help consumers to overcome these barriers in a number of ways, including by restructuring the consumer tax credit for PEV purchases. At present, this credit doesn’t benefit the lower or lower middle classes, the demographic with the most potential to grow the electric vehicle sector. Consider the owner of a PEV with a 16 kWh battery. To receive the full $7,500 tax credit, the owner must earn at least $54,600, which is more than double the median income (Carnegie, 4). The lower the consumer’s income, the lower the value of the tax credit and the smaller the incentive to purchase a PEV. This policy must be made less regressive if it is to create the demand necessary to drive the long-term growth of the PEV sector. As observed in the U.K., another way to incentivize consumers is to offer a purchase price subsidy for PEV vehicles. This brings the initial cost of PEVs closer to fossil fuelled cars. To help overcome ‘range anxiety’ the government could invest in infrastructure that is complementary to PEVs. It could make recharging stations visible on public roads so that potential customers understand that long journeys are viable in these cars. This would also give those who don’t have access to off-street parking access to charging facilities overnight. Finally, it could provide individual homes with high voltage lines to support home charging for consumers with off-road parking.
One source of revenues for these policies could be introducing a carbon fee on vehicles or fuels and abolishing gasoline and diesel fuel taxes. PEV drivers are exempt from these taxes, but would not be from carbon pricing. Therefore, the transition to PEVs would not cut into government revenue streams as significantly (Carnegie, 16).
Government policy must also target utilities. Governments should work with utilities to innovate new electricity rate designs because consumers will be less likely to enter the PEV market if they face excessively high electricity prices. Indeed, electricity usage at home is markedly different to electricity usage for PEVs. In the home the consumer rarely knows the marginal cost of a unit of electricity at a given time, whereas with PEVs the consumer will be more discerning. Governments should work in concert with utilities to create electricity rate designs that encourage off-peak charging, because it is cheaper for the consumer and less burdensome on the environment. It is cheaper for the consumer because she is able to avoid scarcity prices for electricity that arise during peak times. Encouraging off-peak charging is better for the environment because peak demand is reduced and so the marginal plant at any given time is more efficient. The most efficient electricity generators (such as hydro- or wind-generated electricity) are usually used first to meet demand and once demand exceeds their capacity, the marginal plant becomes less and less efficient. One way to increase off-peak usage is to have dynamic pricing that reflects the current supply and demand situation. This model, known as ‘time-based pricing,’ would require a consumer interface, such as an electricity meter, or timer switches that would delay private recharging until off-peak hours (Houses of Parliament, 3).
The electricity grid must also be reinforced in order to provide the capacity required by PEVs. Recharging stations would place the grid under duress and a future grid would require a boosted capacity. The government must explore the optimal infrastructure investment strategy for all parties involved. Reducing the emissions associated with electricity generation will increase the downward effect of PEVs on emissions. For example, in the U.K., PEVs currently incur emissions savings during use of about 30%. If a greater proportion of electricity became low-carbon electricity, then PEVs would contribute to over 55% of emissions savings (Houses of Parliament, 3). Although some are skeptical of the possibility of the de-carbonization of the grid, renewable portfolio standards for utilities have been introduced in attempt to achieve this.
Equally important to the type of government policies are the target areas. Initially, the federal government should focus its PEV policy efforts on states that have the electricity-generating infrastructure best suited to the PEV market, for example, states that either have a high number of clean and renewable electricity generators or show a commitment to building the PEV sector (Carnegie, 2-4). These should be analyzed for best practices and advertised to less committed states in order to demonstrate to these states the potential benefits of supporting the PEV market. A platform that reduces information asymmetries between states on this issue would be useful (Carnegie, 1).
Up to this point, the U.S. government has made a meaningful contribution to the growth of the PEV market. In the long term, however, its current efforts may lose momentum and fall at the behest of the supply- and demand-side obstacles mentioned above. Modified or new regulations are required to sustain the commercialization of PEVs.
The various interest groups that try to bring their position to bear on policy are beyond the scope of this post. However, it is important to acknowledge how polarized the U.S. is on PEVs. PEVs are a disruptive technology and threaten the profitability of well-established energy and automotive interests alike (Carnegie, 4).
- Gordon, Deborah, Sperling, Daniel and Livingston, David. “Policy Priorities for Advancing the U.S. Electric Vehicle Market.” The Carnegie Papers. 28 June 2014. Web. 2014. <http://carnegieendowment.org/files/electric_vehicles.pdf>
- Lee, Henry. ‘Appendix 3: Looking Ahead: The Emergence of an Electric Vehicle Industry.” 28 June 2014. Web. 2014. <http://siepr.stanford.edu/system/files/shared/pubs/papers/EmergenceofElectricVehicleIndustry_Appendix.pdf?breadcrumb=%2Fexperts%2F144%2Fhenry_lee>
- Parliamentary Office of Science & Technology, U.K. Houses of Parliament. “Electric Vehicles.” Post Note Number 365. 28 June 2014. Web. 2014. <http://www.parliament.uk/documents/post/postpn365_electricvehicles.pdf>
Additional Blog Posts
Student Blog Disclaimer
The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.