Improving Incentives for Clean Vehicle Purchases in the United States: Challenges and Opportunities

Improving Incentives for Clean Vehicle Purchases in the United States: Challenges and Opportunities

J.R. DeShazo

In recent decades, federal and state policymakers in the United States have adopted various policy incentives to induce drivers to purchase advanced clean vehicles, aimed at reducing air pollution and greenhouse gas (GHG) emissions. Although these policies initially focused on hybrid and natural gas vehicles, they now also support purchases of plug-in electric vehicles (PEVs), a new generation of which became available in 2010. The development of fuel-cell and other emerging vehicle technologies, currently in the early stages of commercialization, may encourage policymakers to implement the next generation of clean vehicle purchase incentives within a few years.

Federal and state vehicle incentive policies differ along many dimensions. They take many forms, including rebates, income tax credits, sales tax exemptions, and fee exemptions. Some policies target specific vehicle technologies, such as offering differential incentives for pure battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs) or by varying the incentive on the basis of battery capacity. Other policies target specific types of drivers (e.g., based on their residence in a high air pollution area). Finally, some policies offer financial incentives only for drivers’ vehicle replacement decisions, whereas others are evolving toward combining retirement and replacement decisions (e.g., “cash for clunkers” programs and incentives for the purchase of an advanced clean vehicle).

The goal of this article is to evaluate the effectiveness of current vehicle incentive policies in the United States and to suggest improvements for this broad class of policy instruments. To evaluate the effectiveness of policies, I examine three broad questions. First, what factors influence the ability of the policies to deliver actual cost savings to drivers? Second, how effectively do the policies target the externality that they are intended to address? Third, how can we improve the cost effectiveness of these policies in practice?

The remainder of the article is organized as follows. In the next section, I provide background on the growth in the early PEV market and present evidence on the types and value of vehicle purchase incentives adopted by the U.S. federal government and state governments. Then I examine several potential obstacles that may prevent these incentives from ultimately offsetting consumers’ cost of purchasing PEVs. Although these obstacles vary across types of incentives, they may include low policy salience, complex or limited eligibility, higher-than-expected redemption costs, and market incidence conditions that may enable manufacturers or dealers to capture part of their value. This is followed by a discussion of the challenges that arise as policymakers seek to use a single policy to target multiple externalities. Next I discuss the limitations of these “second-best” policies to efficiently maximize welfare and suggest severalmodest and practical steps aimed at making these policies incrementally more efficient. To illustrate how such policies might work in practice, I focus on California’s experience. Finally, I explore options for improving the cost effectiveness of vehicle purchase incentives. I conclude by suggesting specific policy design improvements that would enhance economic efficiency and cost effectiveness and then briefly discuss future research needs.