Friday Focus: Markets vs. Mandates – A View of EV Policy in America. 

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What the US is getting right — and wrong — about the move to electric vehicles
Rachel Reed, Harvard Law Today, June 23, 2023

EVs aren’t a sure-fire climate change solution, says one Harvard Law School researcher.

Shortly after his inauguration in 2021, President Joe Biden issued an executive order committing the United States to achieving net-zero emissions across the economy by 2050. With the transportation sector responsible for the largest share of greenhouse gas emissions in the U.S., tackling gas-powered automobiles would seem like a natural goal for the Biden administration. Indeed, as part of the Inflation Reduction Act of 2022, or IRA, Congress and the administration approved new and continued subsidies for electric vehicles, in the hopes of both keeping production onshore and making EVs more attractive to consumers.

But what seemed like simple solutions may not be, says Ashley Nunes, a senior research associate at Harvard Law School’s Center for Labor and a Just Economy. Nunes, who studies how innovation impacts markets, says that while some government policies have increased adoption of EVs, they aren’t always targeted equitably or effectively. In fact, as his research suggests, they can sometimes make the problem worse.

So how can the administration — and other national leaders — better reduce emissions from transportation? In an interview with Harvard Law Today, Nunes explains the Biden administration’s policies on EVs, what it’s getting right and wrong, and changes he says could lead to an even greater reduction in overall emissions.

Harvard Law Today: How did the Inflation Reduction Act impact the market for new electric vehicles?

Ashley Nunes: In my view, the Inflation Reduction Act changes little for consumers. What we are now calling the Clean Vehicle Motor Credit is still $7,500 — that’s the same amount that has existed for the better part of over 10 years before the bill. The difference is that previously, it was designed as a tax credit, which primarily benefited wealthy people. The Congressional Research Service estimated that nearly 80 percent of the total value of these credits was claimed by households that made over $100,000 a year.

The IRA did a few things, the most beneficial of which for middle- and low-income Americans was to effectively turn the credit into a rebate. It’s still structured as a credit, but what happens now is that when you go in to buy the car, it is turned into a rebate for the consumer at the point of sale. The credit essentially moved from the consumer to the dealership, which can now claim the credit. So as far as the consumer is concerned, if I buy an electric vehicle, I’m getting $7,500 off. That’s the good news, and I’ve been a huge proponent of that change. I think it’s really important to offer point of sale incentives for technology to go mainstream.

HLT: So, what’s the bad news?

Nunes: One problem with IRA, at least for electric cars, is that you now have requirements for the critical minerals needed to produce the cars, and this is a thorn in the side of people trying to spur widespread adoption. There are three main parts stemming from the law. The first is that the vehicle has to be assembled in North America, which is easy enough to meet. The larger problem is that what the bill effectively says is that as time goes on, half the credit, which is about $3,750, can be claimed if at least a certain percentage of the critical minerals that are used in the batteries come from the United States or a country that we are friendly with. The other half of the credit is pegged to the value of the battery components coming from the United States or a friendly country. And this is problematic, at least in the short term, because currently our batteries are constructed, and the minerals are processed, in China in large part. Reading these provisions as they are currently written suggests the intended goal is less about EV adoption and more about lessening our dependence on China. This makes IRA less of a climate bill and more of an energy security bill.

“Reading [the Inflation Reduction Act] provisions as they are currently written suggests the intended goal is less about EV adoption and more about lessening our dependence on China. This makes IRA less of a climate bill and more of an energy security bill.”

HLT: Are there other ways in which the Biden administration is trying to influence the adoption of electric vehicles? How successful do you think those efforts have been?

Nunes: The most recent piece of regulatory policy that we have seen related to EVs is the tailpipe emission standard that was proposed by the Environmental Protection Agency in April. The standard effectively says that the overall fleet produced by each automaker must have an average tailpipe emission of 82 grams of carbon dioxide per mile. An EV counts as zero. So, the more EVs you sell, the lower your average tailpipe emissions will be. This proposal is going to go to court, and will be the subject of many, many court battles. You can bet on it.

That’s because many people rightly argue that it is de facto means of spurring EV adoption. What they are saying – and we’ve done the modeling to show this — is that you need to have 60 to 62% of your fleet of sales be electric cars in order to comply with the standard. If you don’t have that, it’s going to be very difficult to comply with the standard. The administration won’t say the rule is designed to get manufacturers to sell EVs. The president and his allies want to appear to be impartial to specific decarbonization strategies. But widespread EV adoption is really what the president — and this proposal – aims to do.

HLT: In your view, what is the administration doing right? And where is it getting things wrong?

Nunes: It’s refreshing to see an administration that takes the threat posed by climate change seriously. If you look at the Inflation Reduction Act, for example, one of the things I think people should be very heartened by is a $4,000 credit that is available for purchasing secondhand electric cars on the market. We actually published a study about this. I think that’s something the administration and Congress in general should be commended for.

IRA also offers a production credit to manufacturers, though whether this will translate into lower prices for consumers remains unclear. Last year in the United States, we sold over 750,000 electric cars. That’s about a tenfold increase from a decade or so ago. But during that time, the price of EVs has actually gone up. So, I think the administration and Congress need to think more carefully about price points of technology and how these price points change. There is an argument that prices for technology decline over time — and they can, as happened with cell phones — but what’s true of one industry is not necessarily true of all. This is particularly relevant because this administration has set very aggressive targets for emissions reductions. A recent study showed that one out of every two Americans is seriously considering buying an electric car, yet only 750,000 out of close to 17 million cars sold last year were EVs. You can do the math — you’d expect to see 8 million electric cars sold, but something is holding people back. Price is arguably the most important reason why. Legislators need to address that in a way that makes sense. And current subsidies aren’t the answer. Knocking $7,500 off a $60,000 car matters little to middle and low income household because $52,500 is far more than these households ever could — or would — spend on a car.

“A recent study showed that one out of every two Americans is seriously considering buying an electric car, yet only 750,000 out of close to 17 million cars sold last year were EVs … Price is arguably [holding people back].”

HLT: What do you make of California’s ban on the sale of gas-powered vehicles beginning in 2035? And what do you think that impact will be?