Stop the Squeeze: Accelerate Net Zero

After unexpectedly passing the lower house a few weeks ago the Inflation Reduction Act has been signed into law by President Biden. This Act is not only a green energy bill, but one that aims to bring down energy costs and increase America’s energy security, all while cutting emission output by around 40% by 2030. The USA has clearly signalled to the world that the response to the global cost of living crisis and the existential threat to energy security posed by Russia and China, should not be to turn back the clock on net zero, but to accelerate it. 

There are seven separate provisions that aim to help consumers, businesses and manufacturers transition to e-mobility in one of the most comprehensive packages in the world. It is not a perfect policy by any means and we will explore some of the issues below however, whilst many countries, including the UK are phasing out EV incentives, the democrats are ramping it up and positioning EVs as a viable way to lessen the blow of the cost of living crisis.

Provisions for Consumers

Individuals purchasing a new vehicle will still be entitled to a $7,500 tax benefit but there have been some crucial changes in how this is claimed. Manufacturers will no longer have a limit of 200,000 vehicles this tax credit applies to. This means manufacturers that have not been able to offer this incentive such as Ford, Tesla and Toyota, due to reaching this ceiling, can now do so.

Consumers would also have the choice to assign these tax credits to a car dealer allowing them to see a reduction in price at the point of purchase rather than waiting for the end of the tax year.

A new $4,000 tax credit would also be available for those buying on the second-hand car market. The majority of vehicles are not purchased new and this is especially true for low and middle income households. These credits are only available if you have an income less than $150,000 and the car is under $55,000 or the van is under $80,000. By expanding the remit of the tax credit system and creating a price and income cap they have ensured it will go to households who will feel the cost of living crisis more. However, it does not help the lowest income households as you can only be rebated on what you have paid in tax the previous year. On average that means people need to earn over $50,000 to get the full new vehicle tax credit meaning those which will be struggling the most will have less taken off of the vehicles purchase price.

Despite its pitfalls the policy is in stark contrast to the UK where the electric vehicle car grant has been rolled back despite consumer purchasing power declining rapidly. Although it may not reduce the number of EVs being sold, this, and having no incentives for used EVs, is likely to mean lower income families will also be priced out of saving the most money.

So how much can consumers actually save under the Inflation Reduction Act? Research conducted by Rewiring America suggests that a household taking advantage of all the provisions in the Act, including switching to a clean vehicle could save $1,800 per year. 

And over the course of a vehicle's life over $14,500 can be saved on fuel costs alone according to the US Department of Energy’s National Renewable Energy Laboratory.

These cost benefits for people transitioning to green energy are not marginal but are massive and could be the difference between households staying afloat in the difficult months ahead or facing ever increasing strains on finances. 

The problem

As with all policies there are issues which could see consumers missing out, and the caveats for this could potentially be huge. Firstly, PHEVs are eligible for the tax credits in the current scheme and there is nothing in the new scheme to suggest they will not be included. There is a growing mountain of evidence to suggest PHEVs are the worst of both worlds, working out to be more expensive to run than predicted, and more polluting than official tests state.

However, there is a bigger issue. The Inflation Reduction Act not only tackles the cost of living crisis but also aims to tackle the energy security crisis. There may be such a thing as an Act trying to do too much. In order for a vehicle to qualify, none of the materials used, including metals mined for the battery, can come from a ‘foreign entity of concern’. According to Alliance for Automotive Innovation, that disqualifies 70% of EV models on the US market immediately meaning it could make it difficult to get the tax credits.

Manufacturers do have time to comply but with only 8% of battery material being sourced from the USA this is a steep mountain to climb, even with provisions within the act to boost manufacturing and mining capabilities within the country. It will be crucial that these barriers are avoided and a balance can be made between energy security and making sure consumers see the most savings possible.

Lessons for the UK

With a new government being formed in the midst of such uncertain times it is crucial that they continue with their net zero ambitions and accelerate the energy transition in order to help alleviate the strain being caused by the cost of living crisis. There are simple, cost effective policy instruments that can be used to help consumers unlock such savings when buying power is so limited. The ZEV Mandate which will be implemented in 2024 should make selling an EV more profitable, manufacturers should ensure these savings are passed on to the consumer.

Just four years ago the USA crashed out of the Paris Agreement, although the Inflation Reduction Act signals the USA’s ambitions to be world leaders in emission reduction it highlights the precariousness of administration changes.