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Evaluating Benefits of EV Subsidies Under the Inflation Reduction Act

October 7, 2024
By: Berkeley Rausser College of Natural Resources

image of electric cars plugged in and charging on the streetA new study by a multi-university team of economists shows that electric vehicle tax credits under the Inflation Reduction Act (IRA) decreased climate pollution and benefited US vehicle manufacturers but have mixed benefits relative to taxpayer costs.

The study, published today as a working paper by the National Bureau of Economic Research, found that compared to pre-IRA policy, the IRA subsidies produced $1.87 in US benefits per dollar of government spending. These subsidies cost taxpayers $32,000 per additional electric vehicle (EV) sold, since 75% of funds went to consumers who would have bought an electric vehicle anyway. Compared to a scenario with no electric vehicle subsidies, however, the IRA policy generated only $1.02 in US benefits per dollar of government spending.

The IRA is considered by many to be the largest climate change investment in human history, with total costs forecast at up to $1 trillion. In addition to addressing climate change, the law sought to protect domestic manufacturing, secure supply chains, and achieve political sustainability across elections.

“Three compelling questions drove this research,” said Joseph Shapiro, an associate professor in the Department of Agricultural and Resource Economics at UC Berkeley and co-author of the paper.  “First, how have IRA EV credits affected vehicle markets? Next, should vehicle electrification policies reflect differences in climate damages across different EV models? And finally, how do green industrial policies like the IRA EV credits pit trade versus the environment and foreign countries versus the US?”

The research team from Duke, Stanford, UC Berkeley, and the University of Chicago analyzed detailed sales data from dealerships, which let them conclude that most of the spending benefited electric vehicle buyers rather than auto manufacturers. “The IRA EV credits are not a home run,” said Hunt Allcott, a professor at Stanford University and co-author of the study. “While the IRA’s electric vehicle tax credits have slowed climate change and shifted production to US manufacturing firms, they also impose high costs on US taxpayers.”

The study also found that the IRA could have generated far larger US benefits if it provided larger tax credits to cleaner EVs, since the environmental costs of driving an electric vehicle vary substantially across EVs due to variations in weight. For example, switching from a lighter Toyota Prius gasoline vehicle to a heavier Tesla Cybertruck supports vehicle electrification but actually increases climate pollution.

For purchased vehicles, the IRA subsidies require a vehicle to be assembled in North America and have sufficient supply chain content from the US and allied countries.

“These subsidies have both helped and hurt US allies," said co-author Felix Tintelnot, an associate professor at Duke. “Many US benefits came from shifting profits from foreign to US vehicle manufacturers. This profit shifting hurts our allies, but the climate benefits to US allies somewhat offset those costs.”

The researchers obtained these conclusions from comparing vehicle prices, leases, and purchase decisions in the months before and after specific vehicle models gained and lost eligibility for the IRA subsidies. The team also developed a model of consumers’ decisions about which vehicles to buy and auto manufacturers’ decisions about which vehicles to sell.

“This ‘Buy American’ policy pits trade versus the environment,” said Shapiro. “The IRA subsidies have advanced vehicle electrification by partially closing US markets. This is driving ahead on global climate policy but making a U-turn on global trade cooperation.”

The study also analyzes the IRA’s “leasing loophole,” which lets any vehicle leases qualify for subsidies, bypassing the trade restrictions. The study found that this loophole has negative US benefits, since it mostly encourages substitution to foreign vehicles without substantially benefiting the climate.

The study was funded in part by the Becker Friedman Institute of the University of Chicago and by grant funding from the National Science Foundation.

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