Electric Cars Can Stay Juiced Without Subsidies

The Republican tax reform is a chance to see if the plug-in car market can grow organically.

Coming soon to a garage near you.

Photographer: Carla Gottgens/Bloomberg

News that the $7,500 federal tax credit for electric vehicle purchases would be scrapped under the tax reform bill proposed by House Republicans has inspired no shortage of hand-wringing. From environmental and electric vehicle advocacy groups to the very automakers who were once accused of dragging their heels on electric car technology, opponents of the proposal are gearing up to fight for the incentive. But with the battle lines being drawn around the partisan divide on global warming policy, nobody seems to be asking if the tax credit is even an effective or equitable tool for accelerating electric vehicle adoption.

QuickTake Electric Vehicles

There's some strong evidence to suggest it may not be. Speaking of the plug-in credit that was part of his American Recovery and Reinvestment Act of 2009 (actually a modification of a plan initiated by the George W. Bush administration a year earlier), President Barack Obama declared that its subsidy would help put a million plug-in vehicles on American roads by 2015. By the end of that period, just 400,000 vehicles had been sold cumulatively in the U.S., raising real questions about the efficacy of the underlying policy. 

Though the tax credit surely helped sell more electrics than might have been sold otherwise, its impact was blunted by the cheap gas prices that have made trucks and SUVs the hottest-selling vehicles since the financial crisis. Despite the Obama administration's prediction that the recently bailed-out General Motors would sell 120,000 Chevrolet Volts each year starting in 2012, cumulative sales of the Volt only passed 120,000 units in the second half of this year. All of which proves that even the perfect alignment of multiple political goals -- rescuing Detroit, fighting climate change, etc -- can amount to an embarrassing failure if they don't align with market incentives.

Happily, market incentives finally seem to be aligning behind plug-in vehicles. Tesla's high-tech cars have lent the technology a veneer of cool that no amount of government policy could create, lifting demand for all plug-ins and encouraging huge investments by automakers in new battery-powered models. Car companies are now competing to roll out the most ambitious electrification strategies, led by high-end brands like Volvo and Jaguar, which announced that every vehicle they sell after 2020 will be either hybrid or fully electric. (It's worth noting that Jaguar is now owned by the Indian conglomerate Tata and Volvo by China's Geely Motors)

In the shorter term, Chevrolet's newer Bolt is already making long-range EVs affordable ahead of the public launch of Tesla's much-hyped Model 3 and Nissan's second-generation Leaf.

This paradigm shift started at the top end of the market, which has come to see electrics as part of a high-tech transformation of the car business. If anything, this top-down trend has made tax credits somewhat controversial by subsidizing purchases of expensive imagemobiles by people who don't need financial incentives to do so. In California, the ground zero for this (and almost every other) automotive trend, income caps have been imposed to prevent further state subsidies for wealthy trend-chasers. Similarly, new German incentives  have capped the value of qualifying vehicles at around $70,000.

In sum, it seems that the long-awaited market for green cars is finally growing organically. Though nobody can say for certain what the impact of a tax credit repeal might be, the evidence suggests for the first time that plug-ins are finally able to sell on their own merits. They may still have a long way to go before they sell as well as pickups and SUVs, but there's scant evidence to suggest that throwing cash on their hoods will sustainably grow the nascent plug-in market.

If nothing else, the repeal of the federal tax credit is an opportunity to understand how real the electric car trend is. If sales do nosedive, that's a data point worth knowing, and one that would help inform future incentives. Such a short-term blip wouldn't dissuade automakers from following through on their massive bets on electrification, but it would allow lawmakers to examine new approaches to the problems which could avoid subsidizing the wealthy, and even do away with subsidies altogether in favor of taxing pollution from internal combustion engines (a far more effective tactic from an environmental perspective).

Having been underdogs for so long, it's not surprising that electric vehicle advocates want to fight for the tax credit that is their major policy accomplishment. But a lot has changed since 2009 -- electrics have transformed from auto industry underdog to inevitability. Rather than fighting the last war, it's worth letting the plug-in tax credit expire in order to prove that the market really has come into its own and can stand on its own two feet. And even if more support does prove to be necessary, we could certainly come up with a more efficient way to do it.

(Corrects to note that Bush administration created the first plug-in credit in second paragraph.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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