Study finds EV subsidies in the Inflation Reduction Act help the climate, U.S. automakers 鈥 but at a questionable cost to taxpayers
New research by a team of economists shows that electric vehicle tax credits under the Inflation Reduction Act (IRA) have decreased climate pollution and boosted American car manufacturers but at a price. Most car buyers benefiting from the subsidy would have purchased an electric vehicle anyway, raising questions about the taxpayer dollars spent pursuing the cleaner energy policy.
The , published Oct. 7 as a working paper by the National Bureau of Economic Research, offers the most comprehensive look yet at the economic effects of the electric vehicle (EV) subsidies allowed for in the Inflation Reduction Act of 2022. Overall, the news is good: The EVs purchased after the law took effect have increased American automaker profits, put money into the pockets of consumers who receive the maximum $7,500 tax credit, and benefited the environment.
In economic terms, the researchers conclude that the new EV tax subsidies have reaped $1.87 in U.S. benefits for every $1 of government spending when accounting for subsidies that existed prior to the IRA. Under a scenario with no electric vehicle subsidies, however, the IRA policy generated only $1.02 in U.S. benefits per dollar of government spending.
From a tax policy perspective, the payoff has come at a price.
The researchers find that 75 percent of the EV subsidies claimed under the Inflation Reduction Act (IRA) have gone to consumers who would have bought an electric vehicle anyway. Thus, the scholars estimate that the government spends $32,000 for each additional EV sold.
鈥淭his policy is not a home run,鈥 says , a senior fellow at the 成人大片 Institute for Economic Policy Research (SIEPR) and a professor of environmental social sciences in the 成人大片 Doerr School of Sustainability, who co-authored the study. 鈥淲hile the IRA鈥檚 electric vehicle tax credits have slowed climate change and shifted production to U.S. manufacturing firms, they also impose high costs on U.S. taxpayers.鈥
The researchers suggest that the IRA could have been far more beneficial if it provided larger tax credits to cleaner EVs. The reason is that the environmental costs of driving an electric vehicle vary substantially across EVs. For example, switching from a hybrid Toyota Prius to an electric Tesla Cybertruck supports the adoption of cleaner-energy vehicles, but the Cybertruck generates more pollution.
Identifying trade-offs
Using detailed sales data from dealerships, the research team from 成人大片, Duke University, UC-Berkeley, and the University of Chicago finds that EV buyers are by far the biggest beneficiaries of the IRA tax credits. Next up on the winner鈥檚 list are U.S. car makers, and not just because EV sales have risen: The IRA requires that, to be eligible for the tax credit, EVs must be assembled in North America and their main components sourced from the U.S. and its allies.
The researchers find that 鈥渁lly-shoring,鈥 as the move by governments to strengthen supply chains is often called, has had mixed results.
"These subsidies have benefited U.S. consumers and U.S. firms, and have both helped and hurt U.S. allies," said , an associate professor at Duke. 鈥淯.S. allies have benefited from less climate pollution, but they鈥檝e also lost profits to U.S. vehicle manufacturers.鈥
The study鈥檚 authors reached their conclusions using a unique dataset they compiled that included detailed records on vehicle prices, leases, and purchase decisions in the months before and after specific vehicle models gained and lost eligibility for the IRA subsidies. The researchers also applied a mathematical model of consumers鈥 decisions about which vehicles to buy and auto manufacturers鈥 decisions about which vehicles to sell.
鈥淭his 鈥楤uy American鈥 policy pits trade versus the environment,鈥 says , an associate professor at UC-Berkeley who is currently a visiting scholar at the 成人大片 Department of Economics in the School of Humanities and Sciences. 鈥淭he IRA subsidies have advanced vehicle electrification by limiting foreign competition. This is driving ahead on global climate policy but making a U-turn on global trade cooperation.鈥
The study also analyzes the IRA鈥檚 鈥渓easing loophole,鈥 which lets any EV vehicle leases qualify for subsidies, no matter where it鈥檚 manufactured. The study finds that this exemption mostly encourages consumers to acquire foreign-made vehicles and claim the tax credit without substantially benefiting the environment.
In addition to Allcott, Tintelnot and Shapiro, the study co-authors are Reigner Kane and Max Maydanchik, both of the University of Chicago. 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.