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We’ve heard a lot from Democrats, President Joe Biden, the media and environmentalists about how great the Inflation Reduction Act (IRA) will be for climate change. Curiously, it was crickets about the new law’s central claim – that it will reduce inflation.
It will not.
But one thing this massive tax and spending behemoth will do — aside from unleashing 87,000 new IRS agents on middle-class taxpayers and small business owners — is expand direct subsidies for electric vehicles (EVs).
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Direct federal subsidies for electric vehicles under a 2010 law were $7,500 per vehicle. But this subsidy expired once a manufacturer produced 200,000 cars. Tesla reached this limit in 2018, which ended the subsidy by January 2020. GM was three months behind Tesla. Toyota just hit the limit this year.
In 2021, Tesla earned $1.465 billion from regulatory credit. FILE: A Tesla logo. (Portal/Lucy Nicholson) ((Portal/Lucy Nicholson))
But the IRA is extending those subsidies indefinitely, even as it sets new limits on the price of vehicles and income levels required to qualify.
But the focus on directly subsidizing electric vehicles overlooks far larger financial shifts that benefit the wealthy at the expense of average Americans. By some estimates, federal and state policies are accumulating as much as $50,000 in additional support per EV.
How does this work? And is it even legal?
The first program, little understood by the general public, is the CAFE (Corporate Average Fuel Economy) standards, administered by the Department of Transportation. The CAFE standards are part of a Byzantine system that dictates fuel economy for the vehicle fleets offered by automakers. For example, if GM sells too many popular trucks and SUVs, it needs to sell enough small, gas-guzzling cars — or be fined.
That fuel consumption penalty was on track to more than double to $1 billion annually when the Trump administration, in one of its latest acts, delayed the increase. But a year ago, the Biden administration moved to impose higher CAFE penalties on automakers for earlier model years.
CAFE penalizes the 95% of consumers who buy gas- and diesel-powered vehicles, paying around $400 for an average car and more than $1,000 for a high-end pickup — effectively giving the money to buyers of electric vehicles further.
Tesla supported this increase. A significant portion of Tesla’s profits come from CAFE credits, which Tesla sells to other automakers. In 2021, Tesla earned $1.465 billion from regulatory credit.
While CAFE is legal, two other programs are of dubious origin, making them vulnerable to legal challenges.
FILE – A 2021 Ford Mustang Mach E is charged at a Ford dealership in Wexford, Pa, on May 6, 2021. Major automakers wrote a letter to Congress Monday, June 13, 2022 to remove the cap on the number of tax credits available to buyers who qualify for hybrid and all-electric vehicles. (AP Photo/Keith Srakocic)
The first is the EPA’s “Carbon Credits for Advanced Technology Vehicles.” In 2012, the Obama EPA invented an illegal tax on hydrocarbon-fueled vehicles and shifted loans to electric vehicles. But that rule assumed electric vehicles were zero-emission vehicles — which they aren’t. Electricity does not come from an outlet in the wall; It is mainly generated by natural gas, coal and nuclear power.
Furthermore, electric vehicles themselves are quite energy-intensive to manufacture – particularly the batteries, which typically contain elements mined in areas that end up looking like lunar landscapes, or which children, some as young as 6 years old, use to mine the minerals they need like to extract cobalt. The EPA explains none of this, pretending that EVs emerge fully formed, like Venus at birth. The bottom line is that this sub-pink rule scoops up to $5,000 per vehicle to EVs, all paid for by conventionally powered vehicle buyers.
A second Obama-era EPA regulation, again without legal support, tests electric vehicles for their equivalent gas mileage under perfect laboratory conditions — running electric vehicles in 70 degrees, no lights, no heat, no radio, no air conditioning. From this unrealistic fuel economy test — batteries lose a notorious amount of performance in the cold — the EPA then applies a 6.7 multiplier to the EV fleet’s CAFE standards. This further subsidizes EVs, likely to well over $10,000 per vehicle, according to some analysts. The EPA test for gasoline and diesel vehicles includes on-road operation in both 90 and 20 degree weather, with air conditioning, lights or heating – in other words, realistic conditions.
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Finally, when all the inputs to EVs are accounted for, from power plants to transmission lines to charging stations, the associated cost is nearly $19 per gallon over the 10-year, 120,000-mile life of the EV. That, of course, looks at all the costs, most of which aren’t borne by the EV owner (guess who’s on the hook for the rest). This is far more than the claimed $1.07 to $3.00 per gallon equivalent.
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As a result, we’ll likely soon hear Transportation Secretary Pete Buttigieg’s claim that EVs have reached cost parity with vehicles that use gasoline or diesel. Do not be fooled. They haven’t, and EVs may never reach parity. If they enjoyed parity, they wouldn’t need a massive system of federal and state support, most of which is hidden from the public.
One last example of how this works. On August 5, Ford wrote to the US Senate urging passage of the IRA. On August 8, the IRA passed the Senate and gave a $7,500 subsidy to electric vehicles. On August 9, Ford increased the price of its F-150 Lightning EV pickup truck by up to $8,500.
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Chuck DeVore is Vice President of the Texas Public Policy Foundation and served in the California Legislature for six years.