The following is an excerpt from Designing Climate Solutions: A Policy Guide for Low-Carbon Energy by Hal Harvey with Robbie Orvis and Jeffrey Rissman.
In the 1990s, Atlanta was out of compliance with federal air quality standards for ozone, and vehicle emissions were primarily responsible. In 1998, the legislature passed a $1,500 tax credit for alternate fuel vehicles, which was increased to $2,500 for all low-emission vehicles and $5,000 for zero-emission vehicles over the next 3 years. The tax credit applied to buyers and first lessees of EVs. At the time, the bills were uncontroversial.
As years passed, EVs became more widely available and declined in cost. The tax credit was successful at helping EVs gain a foothold in Georgia, particularly in Atlanta, where the range limitations of early EVs were less problematic than in rural areas. By mid-2015, Georgia had more EVs in service than any other U.S. state except California.
EV costs declined and availability increased during this period. In 2015, one of the least expensive EVs, the Nissan Leaf, had a sales price of $30,000, or $22,500 after the $7,500 federal tax credit. Dealers began offering two-year leases for as little as $199 per month. Georgia’s $5,000 tax credit, spread over 24 months, could cover the entire cost of the lease.
The ability to essentially own an EV for free drew the ire of legislators representing rural portions of the state, who portrayed the policy as “giving free cars to Atlanta yuppies.”
EV advocates recommended cutting the tax credit in half, then phasing the remaining half out over three years. Going even further, the state passed a bill that terminated the tax credit abruptly and also imposed an annual $200 fee on EVs, the steepest such fee in the country. As a result, the market crashed, with registrations declining by 90 percent.
This was a desired outcome for Rep. Chuck Martin, the legislator who sponsored the bill to repeal the tax credit, who stated that the drop-off in sales “vindicates that the credit needed to be removed.” However, it is not a good result for the future of EVs in Georgia, nor for mitigating climate change.
Several lessons can be drawn from Georgia’s experience. First, subsidies must be revisited at known intervals to keep up with technological change. Georgia’s subsidy rate, set to $5,000 in 2001, became overly generous more than a decade after it was enacted.
Second, the policy failed to account for distributional effects (described earlier). For example, if some of the benefits had accrued to rural areas, it might not have garnered so much opposition.
Third, abruptly ending a subsidy policy can cause a dramatic shock to the EV industry. Financial incentives should be phased out according to a multiyear schedule (potentially linked to the cost differential between gasoline vehicles and EVs, as noted earlier).
Fourth, when a subsidy is offered to a lessee rather than a buyer, it may be prudent to spread out the value of the subsidy over time. When the entire subsidy is provided to the first lessee, this makes the car cheap to lease for the first lease term, but the lessor may have difficulty leasing or selling the vehicle when that term expires because the subsequent lessee or buyer will not get any tax credit. A policy that (for example) awards only 20 percent of the tax credit to a lessee per year would ensure that the benefits are spread out among the first 5 years’ worth of lessees (or buyers, if the car were sold within the first 5 years).
Electrification of on-road vehicles will be an important part of decarbonizing the transportation sector. Although EV technology has come a long way, it still needs government policies to accelerate adoption, at least in the near and medium term. Key techniques for policymakers include rebates and subsidies, development of charging infrastructure, and consumer education.
It is crucial that these policies be designed with a long time horizon, that subsidy rates keep up with technological progress, and that they be phased out gradually according to a schedule or formula set years in advance. Programs in Georgia and China show the potential for policy to achieve success and specific pitfalls to avoid. With well-designed regulatory incentives and cost declines from advancing technology, quiet, zero-emission EVs can quickly become a common sight in cities worldwide.
Copyright © 2018 by Hal Harvey, Robbie Orvis, and Jeffrey Rissman. Reproduced by permission of Island Press, Washington, D.C.