Recent advancements in the electric vehicles (EV) market have seen a surge in EV sales, with more than a million EVs now on the road in the U.S. Although the federal EV tax credit has encouraged the adoption of EVs and has played a role in reducing the costs of this technology, the $7,500 credit reduces CO2 at the social cost of carbon (SCC) of roughly $100 per metric ton, which is higher than most estimates of the SCC. So what would an EV credit based on avoided emissions look like?

The average passenger vehicle emits 404 grams of CO2  per mile driven, and a vehicle averages roughly 13,476 miles per year. Thus, the average vehicle emits roughly 5.44 metric tons of CO2 per year just from the burning of gasoline. Most EV manufacturers offer an 8-10 year warranty on their battery, and using a 10 year lifespan, a traditional internal combustion engine vehicle will produce approximately 54 metric tons of CO2 over its lifetime. At a social cost of carbon of $50 per metric ton, the subsidy value would be around $2,722 per EV.  That is if the EV is subsidized as if it runs on 100 percent carbon free power.

EVs are significantly cleaner than traditional ICE vehicles, but the fact that they rely on electricity means that they do contribute to some level of emissions. A study by the Union of Concerned Scientists found that the average EV in the U.S. produces emissions equivalent to a hypothetical gasoline car achieving 73 mpg. Assuming the average EV is driven as much, an EV would produce roughly 16 metric tons of CO2 over its lifetime. At $50 per metric ton, this equates to a cost of $820 per EV. When accounted for, this would bring down the true value of the EV subsidy to $1,902 per EV.

Based on carbon alone, the subsidy value should be less than what is currently offered. Of course, the rationale behind the current value of EV subsidies is to motivate purchases to reduce the costs of EV technology by pushing it down the learning curve. The EV tax credit is encouraging greater deployment of this technology, which will help bring EVs to price parity with ICE vehicles sooner, and at which point the market (hopefully incorporating carbon pricing) can takeover. As EVs reach price parity with traditional vehicles, there seems to be a rationale for having an upfront credit or subsidy based on the carbon benefits of an EV.