We heard a lot from Democrats, President Joe Biden, the media, and environmentalists about how great the Inflation Reduction Act (IRA) will be for climate change. Curiously, it was crickets over the new law’s central claim—that it will reduce inflation. It won’t.
But one thing this massive tax-and-spend behemoth will do—aside from unleashing 85,000 new IRS agents on middle-class taxpayers and small business owners—is extend direct subsidies for electric vehicles (EVs).
Direct federal subsidies for EVs under a law passed in 2010 amounted to $7,500 per vehicle. But this subsidy phased out once a manufacturer produced 200,000 cars. Tesla hit that limit in 2018, which phased the subsidy out by January 2020. GM was three months behind Tesla. Toyota just hit the limit this year.
But the IRA extends these subsidies indefinitely, though it places new limits on the price of the vehicles and income levels needed to qualify.
But the focus on the direct EV subsidy misses far larger financial shifts that benefit the wealthy at the expense of average Americans. By some estimates, federal and state policies heap as much as $50,000 in additional support per EV.
How does this work? And is it even legal?
The first program, little understood by the public, is the Corporate Average Fuel Economy (CAFE) standards administered by the Department of Transportation. The CAFE standards are a byzantine system that mandate fuel mileage for the fleets of vehicles offered by auto manufacturers. If GM, for example, sells too many popular trucks and SUVs, it must sell enough small, fuel-sipping cars—or be penalized.
This fuel mileage penalty was on track to more than double to $1 billion annually when the Trump administration, in one of its last acts, delayed the increase. But a year ago, the Biden administration moved to impose higher CAFE penalties on automakers for prior model years.
CAFE penalizes the 95% of consumers who buy gasoline and diesel-powered vehicles who must pay about an additional $400 for an average car and more than $1,000 for a high-end pickup truck—in effect, handing over the money to EV buyers.
Tesla argued in favor of this increase. A substantial portion of Tesla’s profits come from CAFE credits Tesla sells to other automakers. In 2021, Tesla earned $1.465 billion from regulatory credits.
While CAFE is legal, two other programs have dubious origins, rendering them vulnerable to legal challenge.
The first is the EPA’s “CO2 credits for advanced technology vehicles.” In 2012, the Obama EPA invented an unlawful levy on vehicles powered by hydrocarbons while shifting credits to EVs. But this rule was premised on EVs being zero emission vehicles—which they’re not. Electricity doesn’t come from a plug in the wall; it’s generated mostly by natural gas, coal, and nuclear power.
Further, EVs themselves are quite energy-intensive to manufacture—especially the batteries, which typically feature elements mined in areas that end up looking like moonscapes or that use children, some as young as 6, to extract the needed minerals such as cobalt. The EPA accounts for none of this, pretending that EVs spring up, fully formed, like Venus at her birth. The bottom line is that this sub-rosa regulation shovels up to $5,000 per vehicle to EVs, all paid for by the buyers of conventionally powered vehicles.
A second Obama-era EPA regulation, again, made up without statutory backing, tests EVs for their equivalent gas mileage in perfect laboratory conditions—running EVs at 70 degrees, no lights, no heaters, no radio, no air conditioning. From that unrealistic fuel economy test—batteries lose a notorious amount of power in the cold—the EPA then applies a 6.7 multiplier for EV fleet CAFE standards. This further subsidizes EVs, likely to far more than $10,000 per vehicle according to some analysts. EPA’s test for gasoline and diesel vehicles includes operating on the road in both 90- and 20-degree weather, with the air conditioning, lights, or heater—in other words, realistic conditions.
Finally, when all the inputs for EVs are considered from powerplants to transmission lines to charging stations, the actual dollar per gallon equivalent hits close to $19 over a 10-year, 120,000-mile EV lifetime. Of course, that looks at all costs, most of which are not borne by the EV owner (guess who is on the hook for the rest). This is far in excess of the claimed $1.07 to $3.00 per gallon equivalent.
As a result, we’re likely to soon hear Transportation Secretary Pete Buttigieg claim that EVs have achieved cost parity with vehicles using gasoline or diesel. Don’t be fooled. We haven’t, and EVs may never reach parity. If they enjoyed parity, they’d need none of the massive system of federal and state supports, most of them hidden from the public.
A last example of how this works. One Aug. 5, Ford wrote to the U.S. Senate, urging passage of the IRA. On Aug. 8, the IRA passed the Senate, granting a $7,500 subsidy to EVs. On Aug. 9, Ford raised the price of its F-150 Lightning EV pickup truck by $8,500.