Decarbonizing Transportation: Is the IRA Enough?
The enactment of the Inflation Reduction Act (IRA) has the potential to be a turning point in the history of transportation in the United States. In 2020, electric vehicles (EVs) accounted for less than two percent of total car sales in the country. The new climate legislation aims to change this trend: the Biden administration wants 50% of new vehicles sold to be electric powered by 2030.
The IRA will allocate nearly $370 billion in climate and clean energy investments to decarbonize the transportation sector—the primary source of greenhouse gas emissions in the United States— and thereby help the country reach the Paris Agreement commitment to cut emissions up to 52% by 2030. It has been projected that the IRA would cut emissions by 660 million metric tons in 2030, instead of the 439 million metric tons projected without it.
The IRA also intends to boost the economy by promoting national industries and creating millions of jobs while reducing economic inequalities in purchasing an EV. To boost the economy, the IRA establishes a series of tax credits for EVs conditional to the origins of their battery materials and components, as a recent Kleinman Center insight summarizes. To qualify, 50% of the EV battery components must be manufactured or assembled in the United States, while 40% of critical mineral value must be extracted, processed, or recycled in the United States or in any country with which the United States has a free trade agreement. In turn, these incentives have been estimated to strengthen the economy by creating up to 1.3 million new jobs.
The IRA also aims to create a more equitable market. In 2021, the average price of a new electric car in the United States was $10,000 higher than the average automobile. This upfront difference, in turn, favored higher-income households, which owned EVs on a larger scale than lower- or middle-income ones. To facilitate access of EVs to lower- and middle-income individuals, the IRA offers several additional provisions in addition to the tax credit of up to $7,500. First, the IRA removes the 200,000 vehicle-per-manufacturer limitations, meaning that popular and affordable EVs will again qualify for the tax credit. Second, the IRA incentives are destined only for electric SUVs and vans under $80,000 and other cars under $55,000 –which although are not necessarily “affordable”, they are much less expensive than “luxury EVs”–. Finally, tax credits also cover used EVs valued in no more than $25,000.
While the IRA’s provisions are an exceptional step to decarbonize the transportation sector, it is unclear whether they are sufficient measures to combat climate change and reduce economic inequalities. It is unclear if the market and infrastructure for EVs will respond at an adequate pace to the increasing demand, especially in lower-income settings. Current charger installations are mainly located in higher-income areas, following the location of early EV sales (see map below). If the IRA intends to boost the electrification of vehicles by incentivizing lower and middle-income households, new charger installations need to be planned in low-income areas, thereby considering the principles of smart growth, urban livability, and social inclusion.
A Kleinman Center digest analyzes a similar trend in China, which can serve as helpful input for U.S. policymakers. The federal government has already approved the first 35 state plans to build EV charging infrastructure across 53,000 miles of highways. Some cities—like Santa Barbara and New York—have already started to build such stations. Yet, it’s expected that the needed infrastructure will take more time to be effectively installed. In turn, this time gap can diminish the chances of fulfilling both IRA’s climate and economic goals in the short term.
In the future, policymakers will need to move into more aggressive measures to promote the electrification of the transportation sector—like banning the use of internal combustion engine vehicles (ICEVs) or fostering coordination between states and the federal government–.
Yet, a possible alternative to help achieve climate and economic goals in the interim would be promoting the use of more efficient ICEVs. Switching from the least to the most efficient vehicle can reduce fuel consumption by 10%. There are nearly 65 million vehicle households in the United States, driving an average of 28,000 miles annually. Therefore, the reduction of 10% in fuel consumption of each of these vehicles would lead to 10 billion fewer gallons of gasoline each year. Incentivizing the use of more efficient gas cars would reduce GHG emissions while reducing families’ expenditures in a context where gas prices are soaring worldwide.