The EPA is considering subsidizing electric fuel.
Over the past few years, there has been a lot of excitement about the potential growth of the electric vehicle (EV) market. Much attention has been paid to recent efforts to channel large amounts of public funds into subsidizing the purchase of electric vehicles and the installation of electric vehicle charging stations. In addition to the more widely publicized vehicle subsidies and infrastructure investments, there has been a more subtle incentive directed at the EV market, namely rewarding companies for selling the electricity that goes into EVs.
The main policy that subsidized juice for electric vehicles has been the California Low Carbon Fuel Standard (LCFS). But now there are several reports that the US EPA will add electricity as a clean fuel eligible for credits under the Federal Renewable Fuel Standard (RFS) program. Historically, the two programs have been more widely known for boosting sales of biofuels like ethanol and renewable diesel.
Normally, subsidizing companies to sell a fuel would lower the price of that fuel to consumers, and maybe that will happen in this case. But, somewhat strangely, to date these policies have not appeared to significantly reduce the electricity prices paid by drivers. The reasons are complicated, and we explore them in this report. It’s also worth asking whether we even want it to be cheaper for people to drive their electric vehicles.
The general idea behind the LCFS and RFS programs is to require companies that market gasoline and diesel to blend increasing amounts of “clean” fuels into the products they sell. By blending ethanol or renewable diesel, the average carbon content of a gallon of fuel decreases. Since biofuels are still, generally, more expensive to produce than traditional petroleum fuels, these programs also tend to slightly increase the pump price of blended fuels while generating large amounts of revenue for biofuel producers. The price of biofuels is falling, but the price of the combination of oil and biofuels is rising.
While oil companies periodically complain about these feesconcern of environmental economists has been that these approaches did not raise gas prices sufficient. After all, driving creates all kinds of external costsincluding air pollution of course, but also traffic jams and deaths. Most drivers ignore these costs and the result is too much pollution, traffic and road deaths.
Unlike the RFS, the LCFS has always been able to generate credits not only by blending biofuels into the traditional fuel stock, but also by selling “alternative” fuels such as hydrogen or electricity. These alternatives are unique in that they do not directly replace liquid fuels in the same cars, but rather require entirely new types of cars to use these fuels.
Why would we want to subsidize the cost of driving electric vehicles? The main answer is to make electric vehicles more attractive than gasoline vehicles. You would think that lower electricity prices would boost EV demand, but my work with Dave Rapson and Erich Muehleggar indicates that the demand for electric vehicles is much more sensitive to gasoline prices than to electricity prices.
The operating assumption behind awarding clean fuel credits to electricity is that one mile traveled by an electric vehicle displaces one mile traveled by a gas-powered car, thereby reducing carbon emissions somewhat. If the cost of “clean” fuel is higher than that of regular gasoline, the total driving should also decrease. But unlike biofuel mandates, which further increase the cost of driving, subsidizing juice for electric vehicles could make driving really cheap.
The math, and its implications, can sometimes seem strange. Until the dramatic drop in LCFS credit prices this year, the value of LCFS credits generated by selling one kWh to charge an EV in California was close to the retail price of electricity, and until 3 to 4 times the real cost of producing this energy. Raising electricity values by adding an RFS credit on top of the LCFS could very well bring us back to a situation where companies can make money by giving electricity to drivers, or even paying drivers for take it. The more electric vehicles there are, the more money there is to earn from credits. In 2019, when prices for LCFS credits were around $200 per ton of CO2, a company could have easily made money by driving electric vehicles on a track on autopilot and charging them with electricity. “clean” electricity more than paid for by LCFS Credits.
Another problem the LCFS has struggled with is that it can be surprisingly difficult to measure the electricity that goes to cars, as opposed to air conditioning. It is not yet clear what the EPA plans to do.
Such an Alice in Wonderland result highlights the tenuous logic behind clean fuel subsidies: paying people to use clean fuel will automatically reduce the use of dirty fuel, rather than just expanding the combined use of fuels. At the end of the day, we don’t want people to drive more electric vehicles, we want people to burn less gasoline. Subsidizing electricity for cars will likely have an effect on gasoline, but with some weird shifts along the way.
Of course, rising petrol and diesel prices would boost electric vehicles and reduce other driving-related externalities. There has been a lot of talk about environmental economists in the press and on Twitter over the past few months. The bottom line is that Democrats “finally pushed through major climate legislation because they got smart and ignored the economists.” But adopting legislation and actually reducing externalities are not the same thing. The results of the driving grant, even if it is in an electric car, can make this distinction clear.
Follow Energy Institute blog posts, research and events on Twitter @energyathaas.
Suggested citation: Bushnell, James. “Should we pay people to drive their electric cars” Energy Institute Blog, UC Berkeley, October 10, 2022, https://energyathaas.wordpress.com/2022/10/10/should-we-pay-people-to-drive-their-electric-cars/
