The Inflation Reduction Act of 2022 (IRA) includes several incentives to encourage the electrification of medium- and heavy-duty vehicles. This blog series describes the incentives, examines how the tax credits likely will affect market outcomes, and suggests where future policies might help accelerate electrification.
The first blog post discusses the tax credits for commercial electric vehicles and charging stations. The second blog post will discuss the IRA funding that can encourage the domestic manufacturing of medium- and heavy-duty electric vehicles. The third and final blog post will discuss the investments in electricity infrastructure that are required for the transition and how the IRA supports—or fails to address—these investments.
Special Series: Electrifying Large Vehicles
This special blog series examines the incentives in the Inflation Reduction Act of 2022 that encourage the electrification of medium- and heavy-duty vehicles, whether through tax credits for commercial electric vehicles, charging stations, domestic manufacturing, or electricity infrastructure. To see the specifics, read other articles in the series:
The Inflation Reduction Act incentivizes the electrification of the transportation sector through various tax credits; we explore their implications for fleet purchase decisions, electricity demand, emissions, manufacturing, and government spending.
The Biden administration is riding the electric-vehicle wave and, through the Inflation Reduction Act of 2022 (IRA), has put its money where its mouth is. The administration’s increased investment in electrifying the transportation sector is particularly notable for medium- and heavy-duty (MHD) vehicles—the trucks and buses that move us and our goods and help fuel the economy. These big vehicles pollute a lot, yet they’re a vital part of our transportation sector—so, electrifying MHD vehicles is a great way to eliminate their emissions and reduce their environmental impact.
Unfortunately, fleets have been slow to adopt electric vehicles (EVs); less than half a percent of new MHD vehicles sold in 2022 were electric. The federal government intends to change this trend by providing funds for fleets to electrify their vehicles and install the necessary charging stations. Specifically, the IRA provides two tax credits: a purchase tax credit of up to $40,000 for the largest vehicles and a tax credit of up to $100,000 per charging station.
These tax credits sound like a huge win for MHD vehicle electrification. Accelerating MHD EVs is great for the environment; provides market benefits, such as encouraging innovation and reducing underlying costs; and confers other social benefits, such as reduced reliance on foreign oil and greater comfort for drivers due to reduced engine noise. Yet, numerous questions arise about how effective and efficient these credits will be and whether the credits may produce unintended consequences for the supply chain and vehicle demand.
In this blog post, we’ll explore the possible implications of the IRA tax credits for fleet purchase decisions, electricity demand, transportation-sector emissions, manufacturing, and total government spending. We’ll highlight some of the uncertainties that surround transportation electrification, which may reduce the effectiveness or increase the cost of these tax credits in potentially unexpected ways.
Purchase Behavior for Truck Fleets
Adoption of MHD EVs has been slow, in large part because of the high up-front cost of MHD EVs and the accompanying charging infrastructure. The tax credits in the IRA can reduce these up-front costs with the aim of encouraging the purchase of MHD EVs for truck fleets.
However, the exact effect on purchase behavior will depend on the extent to which the tax credits and other policies reduce the total cost of owning MHD EVs compared to diesel vehicles, which can vary based on market factors.
As an example, consider the vehicle purchase tax credit. This tax credit has the direct effect of reducing the consumer-facing price of MHD EVs and increasing consumer demand. However, an indirect effect could be that manufacturers increase the pre-incentive prices of MHD EVs. If MHD EV manufacturers have market power (which can arise from factors such as few competitors and high barriers to entry), the incentives could enable manufacturers to charge higher prices than in the absence of the incentives. In this case, the market penetration of MHD EVs may remain limited.
Such market responses will determine who ultimately benefits from the tax credits. Although the IRA allows fleet owners to claim tax credits, the ultimate benefits depend on how the direct and indirect effects shake out. If the direct effect dominates, then the tax incentives will benefit the fleets by reducing the total cost of ownership of MHD EVs. On the other hand, if market power enables manufacturers to charge higher prices, the tax credits will yield higher profits for manufacturers, with little or no benefit to fleet owners.
Electricity Demand and Transportation-Sector Emissions
By encouraging the adoption of MHD EVs, the IRA tax credits increase the demand for electricity to power the vehicles. Given the large battery size, charging MHD EVs consumes a lot of electricity.
For instance, an analysis by Gladstein, Neandross and Associates indicates that a fleet of 51 Class 7–8 vehicles in California could consume over four gigawatt-hours of electricity per year, with maximum peak demand exceeding four megawatts, determining the adoption and utilization of MHD EVs. If the supply of electricity doesn’t match the increased demand, then electricity prices could rise, translating into a higher total cost of ownership and lower adoption rates for MHD EVs.
In addition, the emissions benefits from increased adoption of MHD EVs will depend on how clean the grid is. If most of the electricity that goes toward charging these vehicles is generated from fossil fuels, then the tax credits will produce fewer benefits for air quality and the climate. Fortunately, the IRA addresses several of these relevant factors. For example, the IRA provides tax credits for renewable energy production. Together with the tax credits that the IRA offers for purchasing MHD EVs and setting up charging stations, these incentives in concert can help reduce transportation-sector emissions.
Manufacturing Electric Trucks
The tax credits in the IRA may impact the manufacturing process for trucks. On the one hand, if these incentives increase sales of MHD EVs, the credits can help bring down costs through greater economies of scale. As manufacturers produce more MHD EVs, the automakers can reduce the average cost of production by using larger and more efficient production facilities, equipment, and processes.
However, an increased demand for MHD EVs increases the demand for critical minerals—a crucial component in the batteries—which has implications for the price of MHD EVs. From 2021 to 2022, the price of lithium-ion battery packs increased by 7 percent after more than a decade of cost declines. If the supply of critical minerals doesn’t match the increased demand, we could see higher prices for MHD EVs, lower adoption of MHD EVs, and potential leakage of the tax-credit benefits to the companies and nations that supply critical minerals.
Government Spending on Electric Vehicles
The government spending on these tax credits depends on the demand for these vehicles during the program years and the amount of funds disbursed for each eligible vehicle. The demand for MHD EVs, in turn, depends on factors like the development of charging infrastructure, grid capacity, battery technologies, and existing mandates for fleet purchases. The amount disbursed for an eligible vehicle will depend on how the Internal Revenue Service defines a “comparable” internal combustion engine vehicle, which in turn affects the incremental cost of the vehicle—a key factor in determining the tax credit.
While the definition of “comparable vehicle” may be straightforward for legacy manufacturers like Volvo, which produce both diesel and electric trucks, comparing apples to apples would be more difficult for manufacturers that produce MHD EVs exclusively. Also, the incremental cost is likely to change over time, depending on factors like the price of critical minerals and market power.
Similarly, government spending on the tax credit for charging infrastructure will depend on the demand for such infrastructure and the amount of subsidy disbursed for each charging station. The demand for charging infrastructure depends on factors such as the share of fleets that operate out of depots (which are more likely to install their own chargers), the development of public charging infrastructure (which currently is severely limited), and technologies such as battery swapping. The amount of subsidy that’s disbursed for each charger depends on the cost of installation, which also may change over time.
Conclusions
Electrifying trucks and buses in the United States will be an important step in reducing the environmental impacts of the transportation sector, and the IRA’s dedicated tax credits for vehicle purchases and charging-station investments demonstrate a commitment by the US government to accelerate this transition. But, given the uncertainties and the potential for direct and indirect effects of the various tax credits, the net outcomes of these subsidies are not straightforward to predict. Ultimately, the extent to which IRA funding will facilitate the electrification of MHD vehicle transportation and pollution reductions—and at what cost—remains to be seen.
