US tax credits on EVs worth $7,500 available under the Inflation Reduction Act (IRA) will be available at point of purchase from January 2024, replacing a system which requires EV owners to file for rebates in the tax year following their purchase.
The move could provide a further boost to EV demand – which has already been significantly bolstered by the IRA — because while the amount that EV buyers can save will not change, the difference in attractiveness for consumers between a reduction in total cost of ownership (TCO) and sticker price is a big one.
Under the new IRS guidance, consumers can choose to transfer their new clean vehicle credit of up to $7,500 and their previously owned clean vehicle credit of up to $4,000 to a car dealer starting 1 January. “This will effectively lower the vehicle’s purchase price by providing consumers with an upfront down payment on their clean vehicle at the point of sale, rather than having to wait to claim their credit on their tax return the next year,” the US Treasury Department says.
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Under the new rules, dealers will be able to register their sales of eligible EVs to a new Internal Revenue Service (IRS) website and “promptly receive payment for transferred credits”, the treasury says.
Reducing the cost of EVs has long been identified as a key stepping stone towards wider spread adoption. Reframing the IRA incentives as a discount off purchase price may be seen as a more tangible benefit by consumers.
“A big chunk of [higher EV purchasing costs] will be reversed on much lower operating costs, but the truth is many consumers still think just about payments, and not total operating cost,” says industry expert James Carter.
Reducing sticker price will therefore have a bigger psychological impact on buyers, Carter believes, and this is especially acute at times of high interest rates on repayments. Given that TCO is already lower on EVs anyway, tax dollars may be better used to dampen the impact of upfront cost, rather than being distributed over an EV’s lifespan.
“Suppose you drive at the American average of 1,124 miles/month. If using an EV, which gets an average of 3-4 miles/kWh (let us use 3 miles in this case), you will use about 375 kWh/month. This amount is most likely lower than what you pay each month to buy gasoline,” says the US Department of Energy’s Energy Saver publication.
So the TCO benefit of EVs is arguably already settled. It therefore makes sense to reallocate subsidy dollars to sticker price. According to the New York Times, the average US EV purchase in 2022 cost the customer c.$61,000, compared to $49,000 for ICE cars. And although 2023 has seen a series of price cuts from EV manufacturers, outside of the Chevrolet Bolt and the highly anticipated Fisker Pear set to arrive in 2025, the affordable compact EV segment is light on options.
Price parity
There has been criticism of the IRA – most notably from a House of Representatives select committee on the CCP in a letter to the treasury in September, albeit that was more about IRA subsidies potentially findng their way to Chinese state-linked firms, rather than any issues will subsidising the US consumer. But there is no denying that the available tax credits have provided an invaluable boost to EV demand in the US by lowering the cost of new EV purchases.
“With incentives in the IRA scenarios, upfront price parity is reached in the 2023–2025 timeframe, which is about 3–5 years sooner than without incentives,” said US thinktank the International Council on Clean Transportation (ICCT) in a January report. In the report’s optimistic scenario, “the IRA incentives and tax credits reduce electric vehicle prices by up to $10,500, and new BEVs are about $7,000 to $11,000 cheaper than conventional vehicles in the 2025–2030 timeframe”, the ICCT says.
A September report from US-based thinktank RMI found that EVs will reach sticker price parity with ICE vehicles in all global markets by 2030, even with the effects of subsidies taken out of consideration. “In China they removed subsidies, [yet] prices fell, and we have reached price parity already. Subsidies will naturally fall over time as costs fall,” says Kingsmill Bond, one of the RMI report’s authors.
The RMI report cites policy pressure as a major driver in this future BEV sales growth. Over half of the world’s car demand comes from the 21 countries with EV incentive legislation in place, it finds.
Demand, not supply
Perhaps unsurprisingly, automakers are largely supportive of IRA subsidy measures. But they are still guilty, in the view of some, of welcoming measures that boost EV demand on the one hand, but resisting efforts that incentivise them from pivoting more quickly from Ice to EV production.
“Where automakers are increasingly aligned in their support for incentives, whether that comes with charging infrastructure incentives, whether that comes for purchasing incentives for the Inflation Reduction Act, and there is widespread support from both key automakers and their industry associations for this,” Ben Youriev of the climate lobbying thinktank Influence Map tells EV inFocus.
But Youriev says that, beyond automakers’ welcoming of the IRA, the industry has shown resistance to broader decarbonisation policies. “When it comes to the actual key policies that will ensure they do decarbonise and they do actually electrify at the rates that are required to meet climate goals globally, there is still strong negative pushback from a large proportion of the auto industry on things like ambitious greenhouse gas emission standards, on zero emission vehicle mandates, and on ICE phase-out targets,” Youriev continues.
Ciaran has written about finance, politics and culture. He is passionate about e-mobility and what it means for our way of life.
Ciaran has a Masters in Ancient Philosophy from Oxford University.
