Study: EV Subsidies in Inflation Reduction Act Benefit Climate and U.S. Automakers, but Come at a Co

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A comprehensive study led by Stanford economist Hunt Allcott and published by the National Bureau of Economic Research reveals that while electric vehicle (EV) tax credits under the Inflation Reduction Act (IRA) have reduced climate pollution and boosted U.S. automakers, the benefits come with high taxpayer costs. The research shows that most consumers claiming the $7,500 EV tax credit would have purchased an electric vehicle without it, leading to concerns about the effectiveness of the subsidies.

Key findings from the study show that, while the EV tax credits have generated $1.87 in benefits for every $1 spent when considering pre-IRA subsidies, under stricter accounting, the policy only brings $1.02 in benefits per dollar spent. A striking 75% of subsidies have gone to consumers who were already planning to buy an EV, meaning the government spends an estimated $32,000 for every additional EV sold.

The researchers also highlight that the IRA tax credits could have been more impactful if they offered larger incentives for cleaner EVs. For example, while switching from a hybrid Toyota Prius to a Tesla Cybertruck contributes to electrification, the Cybertruck’s larger environmental footprint diminishes the overall climate benefits.

In terms of economic impact, the tax credits have benefited U.S. automakers by requiring that EVs be assembled in North America and their main components sourced from the U.S. and its allies. However, this policy has had mixed results for U.S. allies, as it limits foreign competition while also reducing global pollution.

The study also raises concerns about the IRA's "leasing loophole," which allows any leased EV to qualify for subsidies, even if foreign-made, leading to increased purchases of non-U.S.-made vehicles without significantly benefiting the environment.

This research, co-authored by economists from Stanford, Duke, UC-Berkeley, and the University of Chicago, sheds light on the trade-offs between advancing EV adoption, benefiting U.S. automakers, and the cost to taxpayers and global trade.