Proposed EPA EV Rules Will Hurt Consumers, Industry, And The Environment

The EPA is reportedly planning to propose new emission rules that are intended to increase the share of electric vehicles in new car sales, reaching 60% by 2030 versus a current 6%. Of course, some will compare this to the Apollo program, a major engineering challenge which the U.S. accomplished, but it reminds me more of the old saying, “If we can put a man on the moon, why not all of them?” (Attributed to Cynthia Hand.)

So far, there are only press reports of what the EPA intends, so perhaps the report will have more and different details, but for now, I have to rely on what’s in the media. For example, the EPA claims that this regulation will actually save consumers an enormous amount of money, which is kind of shocking considering the experience to date. They reportedly will argue that the cost per vehicle will be $1,200, but fuel, maintenance and repair savings will be $9,000 over the life of the vehicle.

The only explanation I can imagine is that they employ a combination of wildly optimistic assumptions, bad math, and omitted variables. For example, they may have made herculean assumptions about future oil prices, which have been a source of error in past energy policies. This was the case of the Synthetic Fuels Corporation and the Alaska Natural Gas Transportation System, both of which assumed massive, continuing oil and gas price increases, which proved wildly in error. In addition, it’s possible that the $9,000 in savings are not discounted, that is, ignoring the impact of a large payment up front versus small annual savings over the life of the vehicle.

It’s not clear where the $1,200 additional cost comes from, although press reports suggest that is not per electric vehicle but an average over all vehicle sales. Of course, if 60% of new sales of electric vehicles, it would imply that the cost per electric vehicle is $2,000. Which is interesting, considering that even with $7500 in subsidies, EV sales are only 6% of the market.

The extra cost of electric vehicles is not very transparent, in part because many of the EVs sold now are still high-end cars: a Model S Tesla is naturally much more expensive than, say, a Ford Escape. But a Ford electric F-150 starts at $60,000, whereas the rest of their truck line-up ranges in price from $23,000 to $44,000. And while Tesla has cut prices for some models, its mass market model, the Model 3, which Elon Musk initially promised would be $35,000, still costs $43,000 for the basic model. Electric vehicles seem to cost somewhere around $8,000-$12,000 more than similar conventional vehicles.

The problem is that EV advocates regularly make the disingenuous point that the price of lithium-ion batteries have plummeted in the past decade, 90% or more, implying that EV prices could come down similarly. Except they haven’t: the only model with a long sales record, the Nissan Leaf, costs more now than when it was introduced a decade ago. But to be honest, the current model has much more range (i.e., battery capacity) than the first model, so that adjusted for range, the cost has come down—about 6% per year. (Figure below)

So, while it is true that battery prices have come down about 80% in the past year, car prices have only dropped maybe half that, plus, as the figure shows, battery prices have leveled off the past few years, only partly due to pandemic supply-chain issues. The resolution of those problems should see costs resume their decline—unless demand for minerals and batteries soars, which could see them increase again. The likelihood of a major drop in EV prices by 2032 is remote. At any rate, another 80% decline by 2030 seems far outside any realistic expectations. (The IEA projects a 26% drop from 2021 to 2030.)

How much of the falling costs have been driven by economies of scale and technological improvements, versus relying on cheaper materials and manufacturing from China? That is not clear, but with U.S. subsidies increasingly aimed at domestic manufacturers, expect a sharp reversal of those savings, possibly as much as a 50% increase in battery prices, at least in the medium term.

Which raises another problem that the EPA apparently hasn’t considered, namely, the impact on costs of a massive dislocation in investment. Already there are problems finding the trained workers to install charging stations and accelerating investment will worsen that. The same for boosting demand for rare earths, which are abundant but require long-lead times for new mines (unless you use child labor in the Congo), copper and other minerals. Under the best assumptions, the environmental impact of that will not be negligible.

Further, the EPA seems to be ignoring the greater inconvenience that EVs create for owners: advocates often downplay this issue but it is very real. Calculations using the ‘model’ developed by economists at M.I.T.’s Center for Energy and Environmental Policy Center[i] corrects for this and suggests that there is a significant convenience penalty. And that doesn’t include range anxiety (topic for a future post).

Lastly, the EPA is focused on the supply of vehicles and assuming the demand will be there: “If you build them, they will come,” as Kevin Costner might say. (Driven an Edsel lately?) The U.S. automobile industry has been wrong-footed several times in the past, most recently in the late 2000s when consumers wanted smaller cars than were being produced. EV advocates liked to say this was due to increasing environmental awareness, but the actual correlation was with higher gasoline prices: when gasoline prices fell, SUV sales recovered.

There is a more appropriate analogy to the current proposal, namely the CAFÉ standards in the early 1980s, which required auto makers to build more efficient vehicles and led to a down-sizing of autos: Chrysler even abandoned its largest model, the New Yorker. But the industry then found that, with lower gasoline prices, consumer interest in efficiency dropped sharply: Chrysler’s fortunes improved dramatically when it introduced the larger, less efficient minivan. This presaged the explosion of SUV sales, a strong indicator of real consumer preferences.

The entire debate about electric vehicles is dominated by superficial analysis and cliches, which are often either incorrect or divorced from reality. Serious analysts have admitted to the challenges, but the type of acceleration the EPA suggests would magnify the problems immensely.

Should the EPA proposal, as reported, be adopted, anticipate a third crisis in the automobile industry as consumers shun new EV models, prices for conventional vehicles soar to cross-subsidize EV sales, and inflation takes a hit from higher car prices. Needless to say, these developments will mean the regulations are certain to be relaxed, but only after tens, probably hundreds of billions of dollars have been lost. Money that could be better spent in many places, including on reducing greenhouse gas emissions.

[i] Clinton, Bentley C., Christopher Knittel, and Konstantinos Metaxoglou, “Electrifying Transportation: Issues and Opportunities,” June 2020.