In this article, the author, Maximilian Auffhammer questions how effective offering subsidies on used electric vehicles would be for the environment. Energy Institute at Haas photo.
Does a program to subsidize used electric vehicles make sense?
By Maximilian Auffhammer.
This article was published in the Energy Institute at Haas blog on April 30.
I was recently informed that my electricity will no longer come from PG&E, but from a community choice aggregator (CCA) called Marin Clean Energy. I had visions of green electrons generated by Sean Penn on his feed-in home treadmill making their way into my iPhone X.
After I got over that euphoria I started digging into program offerings of CCAs. With the help of one of our diligent readers (yes, I have readers other than you mom!), I came across a program which provided rebates to the customers of a local CCA for new and (here it comes) used electric vehicles. Maximum rebate amounts for new EVs were $3500 and for $2,500 for used EVs.
That immediately made the hairs on the back of my neck stand up and my head nearly explode. But being the academic that I am, I tried to keep my emotions in check and think this through. It turns out there are some good and some bad aspects to this policy – depending on what your goal is! So let’s think though the efficiency and equity (environmental justice) implications of such a used car subsidy policy.
Economic efficiency means achieving a goal at least cost (think of maximizing the size of a cake you can bake from a given set of ingredients). Once an electric vehicle sells, it will be on the road for some number of miles – say 100,000 or so. Over those 100,000 miles, if driven in a region with relatively clean electricity generation, that vehicle will produce fewer greenhouse gas emissions and local air pollutants (e.g., NOx, SOx and Toxics) than the counterfactual car with a combustion engine under the hood.
As we have argued before here, subsidies for a new technology such as EVs can make sense from an economic perspective in that they push a cleaner technology into the market, stimulate R&D and provide incentives for building the necessary (charging) infrastructure. The sizable subsidies at the federal and state level have likely pushed a number of people into an electric vehicle who otherwise would have purchased a traditional car. The lions’ share of these rebates went to higher income households, since EVs, even after the rebate, are out of low-income households’ price range. So, one can make an efficiency argument in favor of these subsidies for new vehicles.
Now what about this doubling down on rebates? If one of Max’s underpaid graduate students would like to buy a used EV at a participating dealer, (s)he could get a $2,000 rebate through the CCA program (and they threw in a free charger!). That car, just to be clear, also had received the federal and state rebates when it was new.
While this seems like $2,000 cash into the student’s pocket, in fact the subsidy will be split between the dealer and the student since the dealer sets the sticker price, which is higher if he knows that there is $2,000 subsidy. In a worst case scenario, the dealer could retain most or all of the subsidy amount by simply increasing the price of the vehicle by the amount of the rebate. But this is not my major concern. Doubling down on the rebate does not get more EVs on the road for a local program like this (a federal program is possibly a different story). It hence does not decrease the total amount of greenhouse gases emitted. It possibly drops the price of existing used ones. From an efficiency point, that money is better spent on more rebates for new EVs if your goal is to decrease emissions. But this is where equity concerns come in.
Equity is econ speak for “once you have a certain size pie, how big should each of our slices be”. The argument here is that lower income people should get the benefits of EVs as well. And there is a point to this argument. If all EVs drive around Marin County and Los Altos, where environmental quality and incomes are high, the benefits accrue to rich people. If we as a society care about equity, we should push for a cleaner environment in low-income communities.
In my humble opinion, this is of first order importance. Leave your Los Altos bubble sometime and try breathing the air in the central valley on a hot summer day. It is not good. The vast majority of toxics emissions come from the transportation sector and much of the environmental justice literature shows a strong negative correlation between exposure to these emissions and incomes.
Hence more electric vehicles in low-income communities on the surface seems like a good idea as they will likely decrease local pollutant concentrations where they are highest. This, of course, assumes that these vehicles are driven where concentrations are high and not used to commute (and hence accrue lots of mileage) to rich clean places of employment. So if we can target where these used EVs are located by providing these incentives in the dirtiest areas of the state only, this may not be bad policy.
But this solution is truly a band aid and it is unclear whether this an efficient use of ratepayer dollars. If we are serious about addressing the major local pollution exposure issue in California we need to attack this issue head on. While the Federal Clean Air Act has dealt with local pollution problems effectively, it does so at a level of spatial aggregation that is much too coarse. We need programs, separate from the successful climate programs the state runs, that attack the local pollutant problem in these communities directly.
This will likely be a combination of command and control and incentive based programs. I also think this opens the door for many interesting policy design research questions related to the spatial targeting of air quality regulation. It is exciting to see that some economists are getting their hands dirty by serving in different capacities at local air quality management districts (thanks Severin!). We should pay more attention to these issues as a discipline. Hence this privileged economist with solar panels on his roof driving a PHEV to work will work on this issue all summer and beyond with the super talented Catie Hausman to help make air great again!
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.