As an economist researching and teaching public policy, it gives me no joy to say that public policy is a humbling experience for economists. I’m consoled by the excellent company that we keep. No matter the initial perspective, as policy goals morph to implementation, final outcomes rarely resemble the butterfly that designers envisioned.
Sometimes policy is simple — an administrative rule rather than a law and a single, clear objective. Toddlers and dogs were being choked by poorly designed power window switches in cars and trucks. The National Highway Traffic Safety Administration issued a rule mandating that windows close using switches that pull up, rather than push back. Pennies per vehicle, children and pets saved. A home run.
Laws are tougher because lawmakers’ competing interests mean that the laws they pass often aren’t as focused on design or implementation as administrative rules. Consider recent federal and Illinois laws intended to put more electric vehicles on the road. It’s hard to fault the larger goals, but specific elements in each law’s implementation mute the overall impact.
The Inflation Reduction Act (IRA) includes electric vehicle (EV) credits. The bill contains domestic EV origin restrictions, beginning with the requirement of North American final assembly. An immediate impact is an increase in the after-tax price of EVs assembled elsewhere. Domestic capacity will take time to build, and added pressure on a tightly constricted North American EV pipeline will lead to higher prices for domestic EVs. Higher prices will decrease the quantity of new EVs on the road. While the news is not great for consumers, increasing domestic EV prices will create a windfall profit for domestic producers.
Over time, the IRA should stimulate domestic EV production, but more for some vehicles than others. There is a price cap on rebates, which may increase accessibility to lower-income buyers. But the price cap on domestic EVs will be much higher for SUVs and trucks ($80,000) than sedans ($55,000). It’s a strong incentive to go big. Buyers and manufacturers will respond, skewing production in favor of large, inefficient vehicles that require large batteries.
Batteries are the most expensive component of EVs and are likely to remain so for some time. EV batteries are made of many small cells, and the cells in one large battery could just as easily go into several smaller vehicles. For example, a Ford Lightning EV has roughly triple the number of battery cells that a Mini Cooper EV does. Natural resource and battery manufacturing constraints mean that the more batteries needed, the more each will cost. Skewing the mix of EVs toward large vehicles and their big batteries means that every EV will cost more to manufacture. This cost will be passed on to consumers, and the resulting higher prices will generate slower adoption of EVs than would have been the case with a less prescriptive policy.
In Illinois, the Climate and Equitable Jobs Act (CEJA) offers a $4,000 rebate upon the purchase of a new or used all-electric car or truck. The legislation directed the implementing agency to “prioritize the review of qualified applications from low-income purchasers and award rebates to qualified purchasers accordingly.”
In practice, this means that applicants from two-person households with incomes below $55,579 receive first priority. In the first two months of the program, as of Sept. 1, 82 low-income rebate applications had been received and 22 had been paid. Used EVs sold for an average of roughly $51,000 in Illinois in 2021. This is nearly the income threshold for CEJA, and so a small number of low-income applications is not surprising.
However, only 1,064 non-low-income rebate applications were received in the first two months. New EV registrations in Illinois averaged a bit more than 1,200 per month in the 12 months preceding CEJA enactment, implying that not even half of otherwise qualifying median- or higher-income purchasers have applied for the Illinois rebate. Anecdotal evidence suggests that uncertainty as to whether any or all of the $4,000 Illinois rebate would be issued to them played a role in some buyers’ deliberations, and changes at the federal level may also have played a role.
At the federal level, existing near-term bottlenecks are exacerbated as the IRA slams the door on EVs coming from offshore before domestic supply chains are in place. In the long run, perhaps with an eye toward supporting existing domestic manufacturing patterns, the new law skews the mix of eventual EVs toward large, heavy, battery-intensive vehicles. This will increase the price of the average EV, which will reduce the number of new EVs on the road compared to a market-driven strategy. It will also, by design, increase loads on the U.S. energy grid compared to a rebate structure that did not artificially favor large vehicles. Unfortunately, this all has been baked into the bill.
In Illinois, mixed messaging regarding rebate eligibility appears to have limited the early impact of CEJA. But the CEJA goals — increasing the number of EVs on Illinois roads, and giving preference to low-income households — are not incompatible. As the program matures, consumer experience with rebate payments should improve the tepid early response.
Eric Jensen is an economist who directed the Thomas Jefferson Program in Public Policy at William and Mary and was president of Illinois Wesleyan University.
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