🪢 Tension in the Inflation Reduction Act
We should be focused on electrifying miles not electrifying vehicles
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Olaf was hosted by Bloomberg to discuss the Inflation Reduction Act. Below is an except from the interview. You can watch the full interview here.
The EV parts of the IRA
The IRA extends the existing $7,500 tax credit on new vehicles, while changing the rules for which vehicles and buyers qualify.
Buyers: earning cap of $150,000 per year, doubled to $300,000 for a married couple.
Vehicles: $80,000 cost cap, vehicles must be US sourced and manufactured, even down to raw materials.
In addition to the tax credit for new vehicles, there is also now a $4,000 credit for used EVs.
Tension between America First vs Climate interests
The restriction that only vehicles fully manufactured in the US qualify for the credit is a reflection of America First policies, prioritizing domestic manufacturing over other considerations such as minimizing cost or maximizing EV supply. This policy reflects a discomfort that China today is central to the EV supply chain, manufacturing the majority of battery packs, especially as tensions between the US and China spike. The policy will accelerate a shift away from Chinese manufacturing, but that shift was already happening.
In the near term, these restrictions will severely limit the number of electric vehicles that qualify for the tax credit, with around 70% of EVs expected not to qualify. This creates confusion for buyers and even manufacturers as they try to shift their strategies to adapt to the suddenly shifted regulatory landscape.
On the positive side, the new subsidy regime brings long term policy stability with a ten year time horizon.
Partial correction towards less regressive policies
These new policies are less regressive than the existing set of subsidies, which didn’t limit who or which vehicles qualified (a wealthy person buying a Hummer EV seems a suboptimal candidate for a subsidy). Furthermore, the $4,000 credit for used EVs is particularly important for less wealthy buyers.
Two questions mostly overlooked while focusing on these specifics are: (1) does this policy meaningfully move us closer to the goal of reducing emissions from transportation? (2) are subsidies to consumers buying cars the right place to direct tax dollars?
But we should be focused on electrifying miles not electrifying vehicles
You might not want to make it an either/or, but the supply of lithium and other battery materials is limited, as is the money government can put to work to achieve key goals. Directing subsidies to cars that have massive battery packs is like subsidizing sponges that will suck lithium, cobalt and nickel away from the vehicles that could best utilize these supply constrained raw materials. The metric we should focus on is electric miles, not electric vehicles.
Beyond this, we also need to find ways to reduce the amount of energy required to move people and goods: our cars are comically over-designed for the things we need them for.
We argued this point at green.red.blue when the original Build Back Better legislation was on the table.
Here are three ways this bill and the policies it introduces could be improved going forward:
Incentivize smaller vehicles: The most tragic aspect of the IRA is that it originally included a $900 credit to purchase an ebike, but it was struck from the final version (link). It’s crazy that if you buy a new EV, you get $7,500 of the cost subsidized, but if you want to buy an electric bike, you get nothing. The relative efficiency and affordability of ebikes is effectively being punished: you could buy seven and a half RadMission ebikes for the value of the car credit (link). One way of more effectively rewarding less energy intense forms of transportation is a policy being proposed in California of a $2,500 tax credit to any adult within a household who does not own a car (link).
Focus on fleets: Fleets - whether trucks, Amazon delivery vans, shared scooters or Citi Bike - are the vehicles with highest utilization rates and therefore the most leveraged bundle of miles to focus on decarbonizing. Beyond this, they tend to be fit for purpose and designed specifically for the use they are applied, meaning that they consume the energy they need to fulfill their purpose. Subsidies should be directed here most aggressively to accelerate adoption and manufacturing scale while bringing forward the emissions benefits of a quicker transition. There is an allowance in the IRA for commercial vehicles (not picked up by the news cycle but present in section 45W (link)). However, the subsidy cap for small commercial vehicles is equal to the baseline for passenger vehicles. Meanwhile, similar to the missing ebike subsidy, small vehicle fleets like shared scooters and delivery bikes are overlooked: It is striking how much GM benefits from the IRA (it has the most vehicles that could qualify for subsidies) even though it was bailed out in recent memory; meanwhile Bird is on its knees as city governments (including in Santa Monica where it started) tie it up with red tape and provide no support (link), even though the miles it delivers are far, far more climate friendly.
Small vehicle infrastructure: The biggest barrier to the wide adoption of ebikes and other smaller form factors is the danger created by cars. The best way to get around this is to build viable networks of micromobility lanes. I discuss this in my book: Though Copenhagen and Seattle have a similar climate and population size, in Seattle just 3.1% of people commute by bicycle, compared with around 50% in Copenhagen. Seattle had just 3.2 miles of protected bike lanes in 2014; in contrast Copenhagen, has 513km (319 miles) of protected micromobility infrastructure in the city and an additional 167km (104 miles) of "super bike lanes" for longer distance commuters coming into the city (link).
Future bills such as the upcoming ‘22 amortization R&D tax bill do create opportunities to direct incentives towards some of these areas with greater leverage, especially an ebike credit (link).
This article was first published in the RedBlue Newsletter on August 22, 2022.