Energy Institute Webinar
Friday, November 1, 2024
9:30am-10:30am PDT
“The Effects of “Buy American”: Electric Vehicles and the Inflation Reduction Act”
—
Authors:
Hunt Allcott (Stanford University)
Reigner Kane (University of Chicago)
Max Maydanchik (University of Chicago)
Joseph S. Shapiro (University of California, Berkeley)
Felix Tintelnot (Duke University)
Presenter:
Joseph S. Shapiro
Agricultural and Resources
Economics and Department of Economics
University of California, Berkeley
Overview:
The Inflation Reduction Act (IRA) may be the largest climate change investment ever. A new working paper explores the IRA’s electric vehicle (EV) tax credits, which could cost US taxpayers $70 to $390 billion. The study explores how these credits have affected vehicle markets; how the credits could generate larger benefits if targeted at the cleanest EVs; and how such “Buy American” and the “leasing loophole” impact domestic and foreign EV producers.
Abstract:
The authors study electric vehicle (EV) tax credits in the US Inflation Reduction Act (IRA), the largest climate policy in US history, with three goals. First, they provide the first ex-post microeconomic welfare analysis of this central component of the IRA. Event studies around changes in eligibility for EV tax credits find that short-run economic incidence falls largely on consumers. Additionally, domestic content restrictions on tax credits for purchased vehicles have driven enormous shifts to leasing. Their equilibrium model shows that compared to pre-IRA policy, IRA EV credits generated $1.87 of US benefits per dollar spent in 2023, at taxpayer cost of $32,000 per additional EV sold. Compared to scenarios with no EV credits, however, the IRA EV credits created only $1.02 of benefits per dollar of government spending. Second, the authors characterize the gains from policies targeting heterogeneity in externalities across vehicles. They find that relative to uniform credits, differentiating credits across EVs according to their heterogeneous externalities would substantially increase policy benefits. Third, they quantify tradeoffs in the IRA EV credits between foreign and domestic welfare and between trade and the environment. The authors find that the IRA EV credits benefit the environment but undermine trade, since they decrease global carbon emissions but use profit shifting to decrease foreign producer surplus. A controversial IRA loophole that removes domestic content restrictions on tax credits for EV leases has negative domestic benefits. Full Paper