Published on January 19th, 2018 | by Loren McDonald0
Huge Flaw In US EV Tax Credit Will Hurt GM & Tesla Beginning In 2020
January 19th, 2018 by Loren McDonald
The survival of the federal electric vehicle (EV) tax credit is a good thing for the US auto industry and consumers, but a huge flaw in its design will give EV laggard automakers a significant competitive advantage beginning around 2020.
Redesigning how the tax credit is structured would level the playing field among auto manufacturers (and consumers), but pursuing change in the legislation would also put it at risk of being eliminated entirely.
As background, the federal EV tax credit phases out over 5 quarters beginning the quarter following the one in which a manufacturer sells 200,000 EVs in the US (see chart). The tax credit ranges from a high of $7,500 to a low of $2,500 based on the EV’s battery pack (how much energy it can store).
The EV Laggard “Pricing” Advantage
As the first companies to see the tax credit phase out (both likely in late 2019), GM and Tesla stand to be at a significant sales disadvantage against competitors.
In 2020–2021, battery prices will have declined significantly (perhaps by as much as 50%) from current costs, the average range of most new EVs will be 250–300 miles, charging infrastructure will be expanded greatly, and American consumers will have nearly 100 choices of PHEVs and BEVs. So those automakers that didn’t invest in EVs early on and achieve solid sales then — basically most everyone except GM, Tesla, Nissan, and perhaps Ford — stand to benefit greatly.
Take an automaker such as Toyota and assume it reaches the 200,000 threshold sometime in 2021 based on a consistent increase in annual growth rate of its only current EV, the Prius Prime PHEV. At that point, EV sales should be seeing a significantly higher volume and comprise perhaps 5% of new vehicle sales in the US and 15–20% in California.
Let’s speculate that in 2021 Toyota launches PHEV and BEV versions of its new C-HR crossover. If Toyota could sell 20,000 combined units per month of the electric versions of the C-HR, it would be able to move 300,000 units that would qualify for the tax credit.
Let’s also speculate that about the same time GM launches a Buick crossover based on the Chevrolet Volt PHEV platform and has updated and improved its Bolt BEV. Both models receive great reviews by the auto trade press, have excellent word of mouth, and are competing directly with the Toyota C-HR for mindshare and customers.
But here is the problem: Buyers of the Toyota C-HR EVs can still take advantage of the federal tax credit (at whatever applicable level), giving Toyota dealers a significant sales competitive advantage versus similar models from GM brands.
That really hurts if you are companies such as Tesla, GM, and Nissan that invested earlier than many competitors, benefited from the tax credit and were able to reduce the cost differences from ICE competitors — the point of the credit.
2–4 years from now, however, many of the electric vehicle laggard automakers will bring EVs to dealers that will benefit from a more developed market, higher levels of consumer awareness and adoption, and the continued availability of the tax credit. In essence, while these “late to the EV game” automakers took little to no risk and sat mostly on the sidelines for years or launched poor-selling compliance cars, in a few years they will directly benefit from the early investment made by a few competitors.
Not to bring geopolitics into this policy discussion, but beginning around 2020 we should also start to see the entrance in the US of Chinese-made BEV crossovers. Assuming significant tariffs are not applied to Chinese vehicles imported into the US, these EVs will likely have an extra cost advantage as well due to the available tax credit.
Image Source: Autocar.co.uk
While it will take Chinese companies at least 3–4 years to build solid brand acceptance and to see significant sales growth, they will still benefit greatly from several years of available tax credits. And assuming these EVs are already priced at or below models from GM, Ford, and Tesla, for example, the Chinese brands would have a compelling advantage over domestic US models. (Note: Some of these Chinese brands might by distributed in the US through an incumbent automaker, which could subject them to that company’s tax credit EV sales count, depending on the legal structure of the distribution partnership.)
What, If Anything, Should Be Done?
In a previous CleanTechnica article I wrote, “7 Potential Revisions to Federal EV Tax Credit,” I suggested implementing a sliding tax credit dollar amount (starting at $5,000 for all EVs and reduced $1,000 each year) until it reached zero dollars. This (or some other similar approach) would put all automakers on an even playing field and the credit would expire for everyone at the same time.
Those manufacturers that invested early in EV development, along with their new customers, would be rewarded by the continued availability of the tax credit. Those automakers that waited until very late, when demand had already neared mass adoption, to bring EVs to market would still benefit from the credit, but no longer have a future competitive advantage.
I reached out to both Tesla and GM and did receive this response from General Motors spokesperson Fred Ligouri:
Tax credits are an important customer benefit that can help accelerate the acceptance of electric vehicles. Because General Motors believes in an all-electric future, we will work with Congress to explore ways to maintain this incentive.
While the EV tax credit barely registers as a blip on the policy radar screen among members of Congress, now that it has survived the threat of being eliminated, should the tax credit be redesigned to level the future playing field among automakers? As it stands today, the tax credit will eventually penalize those automakers that took the greatest risk early in the market for EVs. Pursuing a revision of the tax credit, however, would put it at risk of complete elimination and potentially slow the growing volume of EV sales in the US.
What do you think? Should the tax credit be revised or stay as is currently structured?