CBO: Government will spend $7.5 billion on electric vehicles. What are we getting back?

Over the next seven years, the federal government will spend $7.5 billion on policies to boost the U.S. electric-vehicle industry. But a new report from the Congressional Budget Office raises questions about how quickly these programs will achieve many of their intended goals.

Worth $7.5 billion? (Cars.com)

In particular, the report scrutinized the $7,500 tax credit that the government is now offering to consumers who purchase plug-in hybrids like Chevrolet’s Volt or all-electric vehicles like Nissan’s Leaf. This credit, the CBO estimate, will cost $2 billion between 2009 and 2019.

In the short term, this credit is unlikely to make electric cars affordable, the report argues. Even with the tax break, an average plug-in hybrid would still cost roughly $4,000 more over its lifespan than a conventional vehicle of similar size and performance, assuming that gasoline prices continue to average around $3.60 per gallon (an assumption that might be wrong). In other words, the tax credit would have to be much bigger to make electric vehicles competitive.

That's one reason why CBO only seems to be expecting around 270,000 or so electric vehicles to get sold over the next seven years*—far below President Obama's goal of putting one million electric vehicles on the road by 2015. Still, the report notes, those sales figures could very well go up if either the cost of gasoline goes higher or the price of electricity goes down. (Alternatively, the cost of batteries might also plunge—a recent report from McKinsey & Company predicted that lithium-ion battery prices could fall by as much as two-thirds this decade, giving a major boost to the industry.)

What’s more, for the next several years at least, the electric-vehicle tax credit will have “little or no impact” on America’s overall gasoline consumption or greenhouse-gas emissions, the report said. That’s because of how the credits would clash with the Obama administration’s new fuel-economy rules.

Under those rules, automakers must steadily ratchet up the average fuel economy of the cars they produce — their new car fleets are supposed to average 54.5 miles per gallon by 2025. Yet automakers are unlikely to exceed that overall target, which means that for every electric vehicle they sell, CBO expects them to offset it with a lower-fuel-economy car.

Looking further out, however, the tax credit could have a much bigger impact on overall fuel consumption and greenhouse-gas emissions if it helps jump-start a nascent electric-vehicle industry in the United States, the report said. After all, if electric cars catch on and the costs keep tumbling, then U.S. gasoline consumption could keep falling long after those fuel-economy standards have stopped rising. (Alternatively, a boom in electric cars could allow regulators to set stricter fuel-economy targets down the road.)

Some experts say that the CBO's criticisms are too short-sighted—especially given that the size of the electric vehicle program is a rounding error in the overall federal budget. "This $2 billion is a very small tax break compared to what oil companies get," said Dan Weiss of the Center for American Progress. "It's a worthwhile investment in an innovative technology that the United States was the first to develop. And worldwide demand for electric cars could eventually go a lot higher if oil prices continue to rise."

In addition to spending $2 billion on tax credits for consumers of electric vehicles, the federal government will also spend $2 billion on grants to the battery industry and provide $25 billion in loans to manufacturers of advanced vehicles (the latter is expected to cost taxpayers $3.1 billion, given that most of the loans are expected to be repaid). The Advanced Vehicle Technologies Manufacturing program was first signed into law by George W. Bush but has lately come under fire from Republicans in Congress.

* That's my estimate, dividing $2 billion by $7,500. Of course, not everyone might get the maximum credit, etc. etc.

Related: As battery prices drop, will electric cars finally catch on?

Also on Wonkblog

Wonkbook: Are we winning the future yet?