EV Rebates vs. Tax Credits

Having recently taken a hard look at the cost/benefit of the proposed expansion of federal electric vehicle tax credits up to $19 billion, it naturally caught my attention when I heard that the President was proposing to convert the present system of tax credits into point-of-sale rebates for EVs. Legislation has apparently been introduced to put that into effect, along with a significant expansion of federal grants to manufacturers of EV batteries and other components. Aside from my sense that taxpayers have already subsidized that industry sufficiently for its current stage of development, I have distinctly mixed feelings on the EV tax credit conversion, which seems likely to increase the cost of the program, though it would also increase its fairness.

When the Congress originally established this benefit under the TARP bill in October 2008, it opted for the most conservative of the three main ways it could have provided incentives to purchasers of electric vehicles. First, it chose tax credits rather than cash rebates. That at least provides a time value of money benefit to the government, though it opens the door to a certain amount of fraud. Tax credits also ensure that purchasers must be serious about their investment, since they have to pay more of their own money up front and then wait to recover it when they file their next tax return. But Congress raised the bar even higher by choosing to make the EV tax credits non-refundable. That means that not only must you wait to file your taxes to get the benefit, but the credit cannot exceed your annual tax liability in order to take advantage of the full amount. The last time I checked, that implied that a typical EV buyer would need to earn at least $55,000 per year if single, or $75,000 if married filing jointly--after normal deductions and exemptions. That makes buying an EV with the government's assistance a distinctly middle- to upper-middle-class proposition, at least.

The main advantage of turning the tax credit into a rebate is in making it available to more people, and in the process putting more EVs into the hands of less affluent buyers. That works two ways, by expanding the pool of those who would qualify for the incentive, and also by making it easier for buyers to qualify for financing an EV purchase by reducing the amount that had to be financed. I could envision this putting more people in EVs, sooner than under the current system. Of course that's also its chief drawback, from a taxpayer and federal borrowing perspective. The faster the money is spent, the quicker the deficit grows, or the more taxes must go up--or other programs be cut--to pay for it. It also appears that car dealers are less than enthusiastic about becoming the gatekeepers for this benefit.

Having generally supported the earlier "cash for clunkers" rebates, I was initially somewhat receptive to this idea, even if I didn't see similarly unique circumstances to justify it. However, I'd be a lot more enthusiastic if I thought the change were mainly driven by the imperative to improve our energy security--a logic negated by the paltry amount of oil the first few million EVs will save--instead of shoring up a somewhat arbitrary target that was announced in the recent State of the Union address and has attracted a fair amount of skepticism, including from the car industry that is supposed to execute it. In the end I come down on the side of my fellow taxpayers on this one. Let's leave the tax credit as is and allow the early adopters who qualify for the current version to help bring down the cost of EVs, so that more price-sensitive buyers won't need a $7,500 rebate to afford one later.

A Clunkers Look-back

Somehow I missed last week's minor tempest concerning this summer's Cash for Clunkers program (CFC.) It apparently started when auto industry publisher Edmunds, Inc. issued a report indicating that the effective cost to the government of the incremental sales stimulated by the program averaged roughly $24,000, rather than the $4,000 or so per car that participating buyers actually received. That's based on Edmunds' estimate of the sales they conclude would have occurred in the absence of CFC, shrinking its net contribution from 690,000 vehicles to only 125,000. This prompted a snarky response from the White House, questioning not only Edmunds' analysis but also their motives and basic competence, leading to a polite-but-firm rejoinder from Edmunds. Having expressed support for the CFC concept and its reported results in previous postings, I can't resist adding my own two cents on this affair.

Let's start with a basic fact: No matter how rigorously Edmunds or the federal government analyzes car sales data for this year, the number of cars that would have been sold during the months in question without the clunkers program is inherently unknowable, just as it is inherently unknowable how many jobs have been "saved" to date by the total stimulus program, of which CFC was only one small, belated aspect. This dispute hinges on differences of opinion and underlying assumptions, and the statistical projections of both sides must be taken with a grain of salt. However, any notion that it is somehow out of bounds to look back on the outcomes of such a program to assess its effectiveness should be rejected forcefully. Project look-backs, or post-completion reviews, are among the best tools that corporations have to learn from mistakes and improve future performance. These techniques are no less appropriate in the public sphere, particularly when the government is undertaking so many initiatives that would ordinarily be left to the private sector.

It's important to frame any look-back analysis with a clear understanding of what the project in question was intended to achieve. In this case, CFC was meant to boost car sales and consumer confidence at a time when both were at extraordinarily low levels. It was also aimed at improving the fuel economy of the US car fleet by retiring some of the least-efficient vehicles on the road. Judging it on the cost-effectiveness of the incremental sales it generated reflects a subtle but significant distinction in interpreting those goals, though as a taxpayer I'm certainly interested in knowing how CFC measured up against that criterion. Still, on the basic question of increasing sales, even the data presented by Edmunds are unambiguous.

Looking at the monthly car sales figures included in Edmunds' report, it is clear that US new-car sales jumped from a depressed annual rate of around 10 million units pre-Clunkers--a level too low to sustain the North American car manufacturing capacity now in place--to over 14 million, approaching the typical pre-recession sales for the industry. After the program ended, sales fell back to around the 10 million mark. Although CFC hardly restored the industry to good health, it provided the expected temporary boost in sales at a time when the recent bankruptcy filings of GM and Chrysler had raised new uncertainties for consumers. The fuel economy uplift on the average transaction was also significant, though as I mentioned at the time this amounted to a very small change in the overall fuel economy of a vehicle fleet numbering around 240 million cars and light trucks. So while CFC in retrospect looks to have been a very expensive way to help the industry sell more cars, its performance against the metrics most relevant to its conception stacks up pretty much as advertised.

The larger question raised by the Edmunds analysis concerns the degree to which the government can compensate for weak economic conditions in the private sector, and how expensive the incremental contribution of such efforts can prove, compared to the natural recuperative powers of the economy. Their assessment might also have implications for how we should evaluate the ongoing incentives for advanced technology vehicles. In that light, I have to wonder how much of the heat generated by this episode is instinctive bridling at perceived Monday morning quarterbacking, and how much relates to its potential to undermine the case for a second stimulus that is building in some quarters.

Clunkers 1, Critics 0

I have to admit to being somewhat bemused at the apparent success of the "Cash for Clunkers" scheme, which burned through its initial $1 billion of funding so rapidly that Congress is still scrambling to find more money for it before leaving town. Although the final version of the program wasn't quite along the lines of the idea I supported back in January, it appears to have produced much more useful results than most critics predicted when it looked as if it would mainly move Americans out of old SUVs and into new but minimally-thriftier ones. Given its popularity and the boost it's provided the flagging car industry at just the right time, I very much hope the Senate will pass an extension before escaping the August heat and humidity here.

Let me briefly focus on a few key points concerning the program and its funding. If the report I saw in Bloomberg is correct in showing an average fuel economy improvement from 15.8 mpg for the clunkers that were junked to 25.4 mpg for the new cars that are replacing them, that works out to an impressive annual fuel savings of around 280 gallons for the average driver. That's more than the average Prius driver uses in total. Aggregate that across approximately a quarter-million new cars and it works out to 70 million gallons per year--impressive-sounding but still a relative drop in the bucket in a fuel market of 138 billion gallons per year. The corresponding CO2 reduction would be around 700,000 tons per year, which if you figure the cars removed from the road by this program likely only had a few more years of high-intensity usage left in them yields a CO2 abatement cost in the region of $475/ton. As climate policy, this wins no prizes.

However, despite the immense seriousness of that issue, climate surely can't be the only lens through which to view a program such as this. In particular, when you examine the way the House of Representatives came up with the $2 billion to stretch it through the end of September, it is clear that they viewed it as an extension to--or more properly an acceleration of--the federal economic stimulus. Their bill, which is a model of brevity and simplicity, shifted $2 billion from a $6 billion appropriation for DOE loan guarantees to advanced energy projects. Considering that the DOE still has yet to dole out all the money originally appropriated for this purpose when it was funded under the Energy Policy Act of 2005, and that their highest-profile decision so far was to turn down an application from a major nuclear fuel processing project in Ohio, it seems fair to say that Cash for Clunkers will get this money into the economy vastly quicker than under a stimulus program that has taken its own sweet time about stimulating anything.

As New York Times columnist David Brooks described Cash for Clunkers in last Friday's weekly segment with Mark Shields on the News Hour, "It's costing some billions of dollars, but it's actually temporary, timely and targeted, so I'm all for it." Despite the program's reported administrative glitches, Mr. Shields liked it, too. That may be as close to a bi-partisan consensus as we are likely to get all summer.