Economic Impacts of Eliminating the Manufacturers’ Cap on the Plug-In Electric Vehicle Tax Credit

The Situation

Federal and state governments have created programs to subsidize battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs)—collectively referred to as plug-in electric vehicles (PEVs)—with the goal of making PEVs’ cost competitive with internal combustion engine vehicles (ICEVs). The Energy Improvement and Extension Act of 2008 (H.R. 6049) and The American Recovery and Reinvestment Act of 2009 (ARRA) provide federal income tax credits for new qualified PEVs ranging from $2,500 to $7,500 per vehicle. The current tax credit is manufacturer-specific and begins to phase out when at least 200,000 qualifying vehicles have been sold in the United States as per Section 30D of the Internal Revenue Code.

NERA's Role

NERA was retained by Flint Hills Resources to conduct a study that examines the impacts of eliminating the cap on the number of PEVs an auto manufacturer can sell that qualify for the tax credit perpetually on the PEV market. As part of this study, NERA designed a methodology to integrate a PEV market model with its proprietary NewERA macroeconomic model to estimate the impacts of eliminating the cap on PEV sales and electric vehicle supply equipment (EVSE) requirements, as well as on the electricity market and the US economy as a whole.

For this study, NERA employed its NewERA macroeconomic model, which is a forward-looking dynamic computable general equilibrium model of the US economy. It simulates economic interactions in the US economy, including those among industries, households, and the government. The households in the model have the option to choose from three different types of light-duty vehicles (ICEVs, BEVs, and PHEVs). The household’s vehicle choice depends upon the relative vehicle life-cycle cost differences and consumer’s preference for different vehicles. The NewERA macro-economic model is linked with the NewERA electricity sector model, a detailed bottom-up electricity sector model that simulates the electricity markets in the US and parts of Canada. The electric sector model outputs serve as inputs to a spreadsheet-based rate template to estimate state level electricity rates and bills. A bottom-up Vehicle Vintage Model, which incorporates a detailed representation of the vehicles market, was also coupled with the NewERA model to estimate new vehicle sales of ICEVs, BEVs, and PHEVs. The new PEV sales obtained serve as inputs to the National Renewable Energy Laboratory’s Electric Vehicle Infrastructure Projection (NREL EVI-Pro Lite) Tool to estimate charging infrastructure requirements and totals costs for each state. The analysis considered five types of electric vehicle supply equipment (EVSE): home charger Level 1 (HCL1), home charger Level 2 (HCL2), workplace Level 2 charger (WPL2), public place Level 2 charger (PPL2), and DC fast charger (DCFC). The total expenditures relating to new charging infrastructure are obtained for the US and then passed along to the NewERA macro-economic model such that it can account for these costs when estimating economy-wide impacts.

The Result

An extension of the tax credit on PEVs has the direct consequence of increasing their sales. BEV sales roughly increase by 2.5 times every five years under the scenario where the manufacturer’s cap is eliminated. Across the various PEV types, the analysis shows that BEV sales increase more than those of PHEVs owing to the tax credit reducing the price of BEVs more than that of PHEVs. This, in turn, is due to the tax credit on average for a BEV being $7,500 (in nominal dollars), whereas it is about $5,300 (in nominal dollars) on average for PHEVs.

With respect to EVSEs, home chargers are the predominant type of charging infrastructure for PEVs since these can be installed with relatively small upfront cost (home charger with L2 power level) or with no cost (home charger with L1 power level). However, as the penetration of BEVs is much higher than that of PHEVs over time, the percentage increase in installed DC fast chargers are also much higher than the installation of other types of chargers.

ICEV sales remain dominant throughout the period of study even though there is a large increase in PEV sales. As a result, ICEVs continue to dominate the light-duty vehicle stock through 2035 in large part because of the slow turnover of the vehicle stock and the continued dominance of ICEVs in new vehicle sales.

Higher PEV adoption leads to greater demand for electricity and higher electricity prices and bills for consumers. The study assumes that utilities will invest in EV infrastructure and regulators will allow utilities to recover their costs plus a rate of return through a fixed charge on customers’ bills.