Straight Talk on Electric Vehicles

Dean Foreman
Posted November 30, 2018

With the Edison Electric Institute celebrating 1 million electric vehicles on U.S. roads with a forum event in Washington, D.C., let’s talk, again, about some EV realities – which is important as the buzz around EVs grows. Let’s discuss subsidies, real consumer costs, emissions and batteries.

Who’s Being Subsidized for Buying EVs?

This is a thorny question for policymakers because of the current $7,500 federal tax credit for EV purchasers. There also are several state and local tax subsidies.

The U.S. Energy Information Administration reports that two-thirds of households that buy EVs have annual income in excess of $100,000, nearly twice the nationwide average:

The result is the tax credit becomes a subsidy for the rich. Households in this income bracket also are more likely to have multiple vehicles, so the EV serves a niche of their transportation needs and is a luxury. The obvious question, then, is whether U.S. taxpayers should be subsidizing the affluent. Frank Macchiarola, API vice president for downstream and industry operations, in congressional testimony earlier this year:

“API opposes government intervention in the markets to pick winners and losers because it creates an un-level playing field. … Subsidies such as federal and state income tax credits for the purchase of electric vehicles and tax credits for the installation of electric charging infrastructure distort free markets and are detrimental to taxpayers and the consuming public. In fact, electric vehicle incentive programs have had a ‘reverse Robin Hood’ effect. According to a study done by University of California Berkeley faculty, clean energy ‘tax expenditures have gone predominantly to higher-income Americans. … The most extreme is the program aimed at electric vehicles, where we find that the top income quintile has received about 90% of all credits.”

API joined other trade associations this month in arguing against extending or expanding the federal EV tax credit in a letter to U.S. House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell:

The EV tax credit is particularly bad policy. It is a giant transfer to wealthy Americans. According to JCT [Joint Committee on Taxation], 78% of the individual filers for the credit make more than $100,000 per year and receive 83% of the credits. Electric vehicles are, for the most part, expensive luxury or performance vehicles that only the wealthy can afford.

What About Consumer Costs?

From a current consumer’s standpoint, the main incentives to purchase an EV include getting a tax credit (which would include the federal credit mentioned above plus applicable state and local tax credits) and avoiding transportation fuel costs and taxes. However, the costs outweigh the benefits for most consumers.

For example, if electricity costs 13.2 cents per kilowatthour (kWh) – the 2017 U.S. residential average price per the EIA – and an EV consumes 34 kWh to travel 100 miles, the energy cost per mile is about 4.5 cents. By comparison, an average gasoline engine car that gets around 25 miles per gallon would have a fuel cost of 10 cents per gallon at a current price of $2.56 per gallon. So, an average EV owner could save 5.5 cents per mile, which equates to $550 of fuel savings for every 10,000 miles.

Yet, EVs typically cost more to manufacture and purchase, plus installing a 240v home charging station typically costs more than $1,000. In some states public utilities would increase consumer rates to install charging infrastructure. Furthermore, a large portion of the total cost of ownership includes vehicle depreciation, and electric vehicles lose more than $5,700 per year on average. Just as the market for a used iPhone is limited, it’s also limited for used EVs. 

In some cities, a direct benefit to EVs is gaining access to preferred traffic lanes, which can speed one’s daily commute. This incentive can be important in some areas, but it is not a scalable benefit if any significant portion of the population were to shift to EVs.

Overall to a consumer’s pocketbook, the basic math for EV cost/benefit tradeoffs generally doesn’t add up, and we haven’t even touched on consumer preferences for vehicle range, recharging infrastructure, time and convenience.

The Emissions Picture

What emissions, right? EVs don’t produce any, proponents argue. Indeed, that’s the market perception. But thinking only about eliminating emissions from the tailpipe misses the life-cycle emissions impacts, including those from manufacturing the car and its battery and those from generating the electricity that charges that battery.

The Manhattan Institute’s Jonathan Lesser makes the case that EV environmental benefits are overstated and subsidy costs are understated. The Rocky Mountain Institute has a different opinion.  However, at least two things are apparent in the exchange: 

• The source by which electricity is generated is paramount, otherwise it is demonstrably true EVs are “simply moving emissions from the tailpipe to the smokestack” where the electricity is generated.
• EVs currently are a relatively expensive way to avoid greenhouse gas emissions. 

Recent academic research by Gillingham and Stock underscores the latter point, but they hold out potential for EVs to achieve future cost reductions and expand their network effects as their market share grows. The crux of the argument is based entirely on future expectations which, of course, may change suddenly.

Battery (and Security) Considerations

As the energy revolution has advanced the U.S. toward greater security and increasing self-sufficiency, China’s ambition to dominate the EV industry (subscription publication), including the supply chains for rare minerals that go into EV batteries and their processing, could reverse U.S. progress in lowering energy imports. In a strong recent report, McKinsey highlighted stark facts about primary mineral components in most batteries today: 

• Three countries – China, Chile and Australia – accounted for 85 percent of lithium production in 2017, and this production is almost completely controlled by four companies. 
• About 70 percent of the world's supply of mined cobalt currently comes from the Congo (DRC). The next largest suppliers – Russia, Cuba, Australia and Canada – collectively produced 13 percent of global supply in 2017. 
• 90 percent of cobalt comes as a byproduct of copper and nickel mining, so the ability to produce cobalt and support EV development presents a complex economic proposition. 
• 50 to 60 percent of cobalt refining capacity needed to make it into batteries is located in China.
• Currently, there are no well-defined routes available for the recycling of lithium-ion batteries.

If Americans were unhappy a decade ago with a growing reliance on oil imports, how will they feel in another couple decades if EV battery technology is reliant on concentrated and controversial supply sources? 

The latter point about a lack of recycling is critical. For example, less than 5 percent of lithium-ion batteries are recycled in the European Union. This would need to change if EVs take off. 

McKinsey concludes the growth potential of EVs and other industries that rely on lithium ion batteries will require stakeholders to understand the battery supply chain as its own “ecosystem” and collaborate to provide transparency and agreement in key areas including battery technology, supply side growth, and pricing mechanisms.

It’s significant that this technology has not been appropriately developed or treated as an “ecosystem” so far – and that should matter to those who prefer or promote EVs due to their perceived environmental benefits.