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Monday, April 18, 2016

5 Suggestions for a Better EV Incentive

In 2015, more than 17 million vehicles were sold in the U.S.  Of these, 114 thousand of them were cars with cords. That means plug-in cars were less than 1% of new vehicle sales. Specifically, they made up just 0.655%.

As much as we hear about electric cars discussed in the media, they still have a long way to go before they are the main mode of personal transportation. Certainly, I'd like to see EVs go mainstream and the wave of affordable long-range EVs that are coming out in 2017 will help greatly in this endeavor, but even if these are a smash hit, it will take years to make a dent in the massive number of cars that are already on the road.

Crawl, Walk, Run. I get it. The growth trend is there, but it will take a while. If I were investing, I'd rather be on the side with a small and growing market than the one with a large but shrinking market.

So how do you accelerate the growth? Incentives. There would undoubtedly be significantly fewer EVs on U.S. roadways today without the $7,500 Federal tax incentive. Depending on how big of a battery pack a plug-in vehicle has, it can qualify for from $2,500 to the full $7,500 incentive.

The point of this incentive is to encourage sales of these vehicles and it has done a great job so far. However, now that the incentive has been in use for several years, we are able to better understand how it could be better and the impending failure that it has coming.

Incentives? Who Needs Incentives? 

One could argue that plug-in cars, or any product, should stand on its own and that incentives are a waste of government (taxpayer) funds. Since I am writing this on April 18th and recently wrote a big check to Uncle Sam, I can agree with the sentiment. However, I will make a brief case for the plug-in car incentive.

Our government has a responsibility to maintain clean air and they have a responsibility to make sure that we have the energy we need to maintain, if not grow, our economy. EVs help meet both of these goals. And they do it without the need to deploy troops to desert wastelands or send destroyers to guard the Strait of Hormuz.

How do EVs help with these goals? The Union of Concerned Scientist report clearly shows that, cradle to grave, even with the partially coal-powered grid that we have today, EVs produce fewer emissions than gas cars. As coal plants across the country continue to shut down and wind turbines continue to go up, plug-in cars will continue to get greener.

The energy needed to power these cars can be generated right here in the U.S.. Energy storage solutions are experiencing a technological boom whether it's advanced battery tech or simple pumped hydroelectric storage, there are ways to store the intermittent energy that renewable generation often creates. This gives us a home-grown energy supply.

Additionally, gas cars are heavily subsidized every time they fill up at the gas pump. The price per gallon is far from the true cost that is paid for that fuel. There are environmental, health, and security costs associated with every gallon supplied and burned. It has been estimated that gas cars receive more than $12,000 in fueling cost incentives over a typical vehicle lifespan.

So, the case for EV incentives is that they help meet environmental, health, and security goals while reducing the future costs for the same and all of this with an incentive that is smaller than the lifetime fuel subsidies that a gas car receives.

What's Wrong With The Current Incentive?

The current EV incentive has a few problems. I first touched on this topic in February, near the end of this article.

As mentioned in the opening of this article, plug-in cars are currently only a fraction of one percent of new vehicle sales. Despite this fact, Tesla Motors already has to start dealing with end-of-incentive logistics for their customers and GM is not too far behind. This is exactly the opposite of what's needed. The automakers that are successfully putting plug-in cars on the road are ones that will have their funds cut off first. That is because the current system starts to phase out incentives by automaker 3 to 6 months after their 200,000th plug-in vehicle has shipped.

The current system is a tax credit. This means that you won't see the money until you file your taxes. Most people finance their car purchases. This means that it would be much better for them if the incentive could be used to increase the down payment and reduce the monthly car payment.

The tax credit system is also a problem for retirees. Many of them do not have an income, but that does not preclude them from having saving and occasionally buying a new car. Today, many of them work around this by first leasing the car (allowing the lessor bank to take the tax credit) and then buying out the lease. This does not reduce the number of incentives that are paid out and it unnecessarily inserts a middleman.

A Better EV Incentive 

If the law were to be revamped, how could it be better? A couple of ideas that I've heard are:

1) Make it a point-of-sale incentive instead of a tax rebate
This would solve the "wait until you've done your taxes" problem. It would also help retired folks that are often not even filing taxes.

2) Make it $10k, instead of $7,500
This one is straight forward. A bigger incentive will accelerate things even faster. We certainly saw this in Georgia when they had a $5,000 incentive on top of the federal $7,500 incentive. This launched the unexpected state onto the list of top 5 states with plug-in sales.

Additionally, I think other changes are needed:

1) The limit should not be per manufacturer.
The current system penalizes the companies that are early to embrace and promote the technology. If the goal is to have more EVs on the road, then it should not matter which manufacturer makes them. Let the market/buyers decide which vehicles they want on a level playing field. Auto manufacturers that are currently sitting on their hands know that (with the current system) their 200,000 cars are waiting for them and that they can use it later to make cars that will be even more profitable after the innovators have broken down the barriers. This removes the needed sense of urgency. In fact, it may even encourage omphaloskepsis.

2) The limit should not be some arbitrary number of vehicles sold, rather it should be in place until 2% of all new vehicles are PEV.
Why 2%? Hybrids have been in the 2%-4% of the market for years now. This is enough of a sales volume to have an ongoing market. Let me be clear, I think PEVs will continue to grow far beyond this level, but there's no way that *any* incentives should be stopped before this level of sales volume is achieved.

3) The incentive should go down 15% per year after hitting the 2% mark.
The current system has a 50% reduction. That is a big drop. Under the current system, if you miss an end of quarter delivery date by a day, it could cost you $3,750. Smaller steps at an annual rate is a smooth transition (soft landing) to the incentive-free market.


Here are five purposed improvements to the federal plug-in vehicle incentive. This incentive is important. It helps us, as a country, achieve many of our important goals. The current system has been in place since 2009 and it is in need of an update. The needed changes are relatively minor and can have a great impact. These changes would help people making car payments as well as retired car buyers.

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