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The U.S. electric-vehicle industry has posted impressive growth over the last decade, with hundreds of companies now advancing the plug-in electric vehicle (PEV) market. But there is still much to do to further the transition to electric-drive vehicles. It will take a sophisticated set of policy tools and local action to spur manufacturers, utilities, localities, and states to fully commercialize PEVs.

Key Themes

• With the price, complexity, and carbon footprint of oil increasing and new climate regulations facilitating the shift to cleaner power, there has arguably never been a more pressing time for advancing vehicle electrification.
   
• Light-duty PEVs used for passenger travel, including plug-in hybrid and full battery electric vehicles, have the potential to make the greatest impact on the market and to reduce greenhouse gas emissions and local air pollution.
   
• Federal and state regulators are adopting emissions and fuel economy standards, but, while necessary, those may not be enough to transform the vehicle market.
   
• States and localities, which have generally advanced PEV commercialization more directly and effectively than has Washington, will likely be the source of the most durable solutions.

Recommendations for U.S. Policymakers

Motivate PEV manufacturers: Policies that help boost PEV sales will foster the large-scale commercialization of electric vehicles. In particular, policies should more broadly distribute tax incentives for purchasing these vehicles, and federal electric-vehicle programs should be extended and expanded to provide direct financial incentives to PEV manufacturers. Auto dealers leading the way in PEV sales should also be rewarded.

Shine the spotlight on states: Those states making the most headway in advancing low-carbon electric vehicles should be held up as examples to help assure uncommitted states of the opportunities offered by PEV commercialization. They should also be benchmarked to maintain their leading edge, and states should move away from fuel taxes and toward carbon pricing to compensate governments for their lost revenue.

Cultivate local PEV clusters: The federal government should target PEV policies at those regions where cleaner, renewable electricity is already generated because expanded PEV use in those regions will reduce carbon emissions. Similarly, programs should be targeted at cities already facilitating PEV use.

Promote PEV interactions with utilities: The transition to PEVs will be discouraged if electric-vehicle drivers who need to charge their cars face excessive electricity prices. Utility providers must be encouraged to revisit their electricity rate designs, invest strategically in recharging infrastructure, and investigate the effectiveness of decoupling regulations.

The Low-Carbon Path

Plug-in electric vehicle (PEV) sales and use could soar—or stagnate—from today’s levels. A number of manufacturers are making major investments in PEVs and thousands of consumers, in some key markets, are purchasing them. But much could go awry. The challenge is to craft and strengthen policies that support PEV commercialization in a way that benefits the public interest. Policies are needed that bolster nascent markets, facilitate PEV ownership and use, and boost public confidence in electrified transportation options.

The transition to electric-drive vehicles offers the potential for long-term structural reductions in local air pollution, greenhouse gas emissions, and petroleum consumption.

The transition to electric-drive vehicles offers the potential for long-term structural reductions in local air pollution, greenhouse gas emissions, and petroleum consumption. Moreover, electric vehicles’ power needs can be met with domestic renewable and natural gas resources, and PEVs’ batteries can serve as distributed storage devices for twenty-first-century electrical grids.

Yet, despite their promise of tangible benefits, significant barriers remain to the wholesale adoption of PEVs. Vehicle affordability, battery longevity, public charging availability, vehicle-grid compatibility, system reliability, and consumer acceptability are continuing concerns.

Those barriers are unlikely to be surmounted without policy action. States and regions may have the greatest opportunity to implement effective EV policies, and to send the needed market signals to automakers, utilities, and consumers. A mix of approaches will be needed to make progress. Some issues can be addressed through public education and outreach while others will take concerted regulatory and fiscal measures. Still other roadblocks will require altogether new strategies.

Light-duty, on-road autos represent the lion’s share of vehicles in circulation. As such, light-duty PEVs used for passenger travel, including plug-in hybrid and full battery electric vehicles, have the greatest potential of all vehicle applications to replace petroleum and reduce greenhouse gas emissions and local air pollution. They are thus a good place to start when developing electrification policies. There are, however, other important electric vehicle applications that merit attention that are not addressed here.¹ These include light- and medium-duty commercial trucks, especially those in fleets used for urban deliveries and service, as well as off-road vehicles, such as forklifts, where battery limitations are minimal and air pollution benefits might be considerable.

Many of the issues involved in the U.S. vehicle electrification process have international applications. They will be germane in global urban geographies of China, India, Japan and the European Union, and international stakeholders could benefit greatly from adapting the findings of this analysis to their particular PEV conditions. Tackling the growing global concern over transportation carbon will require an EV roadmap that extends to both motorized and motorizing nations.

Tackling the growing global concern over transportation carbon will require an Electric Vehicle roadmap that extends to both motorized and motorizing nations.

The first step forward is to remove barriers that are nearly as old as motorization itself. The second step is to take advantage of existing opportunities and key points of leverage to transform transportation. The overall goal is for federal, state, and local governments to concentrate their efforts on the main levers for change. This includes advancing strategic policies aimed at motivating manufacturers that are poised to make major investments in PEVs. U.S. states that are leading on low-carbon PEV implementation should be showcased nationally and provided additional federal support. PEV regional clusters should be cultivated to accelerate the commercialization of these vehicles in strategic locations. And PEV–utility company interactions should be promoted through redesigned and reformed utility policy.

There has arguably never been a more pressing time for advancing vehicle electrification. Forces promoting and suppressing PEVs are building. Low natural gas prices are creating alternatives to coal electricity generation, new climate regulations are facilitating the shift to cleaner power, and uncertain gasoline prices are building consumer interest in alternatives. But new petroleum resources are also emerging worldwide, locking in renewed investments in oil-fueled transportation infrastructure.

One transport-energy path leads to the continued use of risky, carbon-intense liquid fuels. The other offers the potential for distributed, low-carbon electricity. Still, moving to clean electricity and PEVs is politically charged because these vehicles are highly disruptive to the current market, with powerful private interests vested in maintaining the status quo. The United States must revisit its PEV roadmap to chart new vehicle electrification opportunities and policies.

On the Road to Vehicle Electrification

Essentially all of today’s light-duty motor vehicles run on oil blended with a small amount of corn ethanol. But the supply of that oil will not remain consistent over coming years. As conventional oil supplies plateau, the 8.5 million barrels of oil a day that fuel U.S. cars and light-duty trucks will likely emit more carbon dioxide and require more energy to produce,² with many new oil resources tending to be heavier (with higher imbedded carbon) and harder to extract.³

Still, even with higher gasoline prices, market forces alone will not elicit a major shift to low-carbon transportation fuels. Absent enhanced policy intervention, petroleum lock-in will continue into the future.

Policymakers keen on vehicle-market transformation realize this and have set goals for vehicle electrification. Momentum for a shift to PEVs has been growing rapidly over the past few years, and the Obama administration has developed federal policies to support its goal of 1 million electric vehicles by 2015. These policies include vehicle fuel economy (greenhouse gas emission) standards with provisions for PEVs, and billions in PEV grants for industry, consumer tax credits, recharging facilities, and research and development, as shown in table 1.

Recently, however, there has been pushback against federal PEV support. It is unclear whether this is political rhetoric in an election year or burgeoning public concern about balancing support for vehicle electrification with fiscal austerity.⁴ Moreover, the impact of the controversy over the failed U.S. investment in the solar company Solyndra—which had to declare bankruptcy despite receiving hundreds of millions of dollars in federal loans—cannot be discounted. U.S. Department of Energy loans have been virtually halted given greater congressional scrutiny on government as a venture capital investor.⁵ All told, it is likely that the road ahead for PEVs will be bumpy.

The new vehicle fuel economy and greenhouse gas performance standards being adopted by federal and state regulators provide a starting point but may not be enough to transform the vehicle market. Even with special incentives for PEVs, studies suggest that these new performance standards—which require a doubling of efficiency by 2025—may be met largely by improvements to current combustion engine vehicles operating on petroleum.⁶ In one scenario that assumes companies utilize the most cost-effective technological improvements, an estimated 1 percent of vehicle sales would be battery electric vehicles in 2025. Policy intervention will be needed if government desires to accelerate the transition to highly efficient, low-carbon, oil-free vehicles.⁷

Generally, states and localities have been able to advance PEVs more effectively than Washington. California has been leading the way, and the state’s Air Resources Board (CARB) has played a central policymaking role. Because vehicle electrification is “disruptive”—that is, it is a new technology that unexpectedly displaces an existing technology—PEV adoption is an inherently slow process. For that reason, CARB maintains a strong commitment to technology-forcing in the early years of the transition.

CARB first adopted aggressive zero-emission-vehicle sales requirements in 1990 but was forced to ease up on the requirements due to the slow pace of technological development. Its adoption of new, stronger zero-emission-vehicle requirements in January 2012 was the first time since 1990 that it strengthened, rather than weakened, those requirements for automakers.

Gathering Momentum and Navigating Bumps

The significant benefits derived from PEVs—namely, reducing U.S. oil use at a time when the price, complexity, and carbon footprint of oil is increasing—are cause for action. Still, the successful development and adoption of an action agenda depends on the perceived urgency of addressing such energy and environmental challenges. If the urgency is great, then the impetus for action is large and the process is accelerated.

Uncertainty and gaps in knowledge are perhaps the most significant challenges for PEV commercialization. One uncertainty is the future cost and performance of PEV technology. Battery and associated drivetrain technology remains more expensive than comparable gasoline and diesel drivetrain technology.⁸ The U.S. Advanced Battery Consortium has said battery costs will have to fall to about $150 per kilowatt-hour (kWh) for EVs to be price-competitive with conventional vehicles, but it is estimated that the cost for EV battery systems is now (in 2012) under $700 per kWh of capacity (see figure 1). These cost challenges are illustrated by the first two mass produced electric vehicles commercialized in the twenty-first century—General Motor’s Chevrolet Volt and Nissan’s Leaf. The Leaf has a 24 kWh battery and the Volt has 16 kWh. These numbers imply a cost premium of up to $18,000 for these vehicles. Many battery experts insist the costs will continue to drop due to economies of scale, learning by doing, and expanded research and development.⁹ But even if they do decline, the cost premium will still be significant. Consumer incentives will be needed for some time. The size and nature of the incentives and the preferred type of policy instrument depend in large part on how quickly costs decline and why they do so.

Another uncertainty is consumer demand. How will consumers respond to different types of monetary and non-monetary incentives, and how will that vary for different types of PEVs and for people of different income groups and demographics? It is not clear how important tax incentives or access to carpool lanes are for the general population.

PEVs also have a more limited range than conventional vehicles, and the market is uncertain about how quickly consumers can overcome their “range anxiety.” Range is not an issue with plug-in hybrid vehicles, so they could prove to be preferred over battery electric vehicles. Also unclear is what role the availability of public and workplace charging, including fast charging, will play. Will owners of plug-in hybrid electric vehicles diligently recharge when the battery discharges or “lazily” run on gasoline for extended periods? These and many other uncertainties and knowledge gaps have an effect on the desirability and effectiveness of different policy initiatives. There is no shortage of bumps on the road to vehicle electrification. But this is true of all disruptive technologies that challenge the status quo.

The issue is how best to manage the transformation of transportation. Most likely, a two-pronged strategy is needed: one that utilizes policies to overcome the vehicle and infrastructure barriers for PEVs and another that promotes the low-carbon use of PEVs. The use of prescriptive regulations and mandates can unlock market transformations to spur PEV development. So too can incentives play a role as long as they reward low-carbon performance instead of PEV technologies.

To ensure that greenhouse gas emissions are reduced quickly and cost effectively, PEV policies will need to be complementary and coordinated.

If reducing greenhouse gas emissions is a key rationale for vehicle electrification, policymakers should seek out the greatest “return on investment” possible in terms of those reductions. To ensure that greenhouse gas emissions are reduced quickly and cost effectively, PEV policies will need to be complementary and coordinated. Perhaps most important in this regard is targeting states and regions that already generate low-carbon electricity, encouraging lower-carbon recharging practices, and integrating carbon reduction as a measurable goal associated with PEV adoption. This would concentrate PEV use in regions where low-carbon electricity dominates and PEV lifecycle greenhouse gas emissions savings are the greatest. The first step is building momentum for PEVs by motivating manufacturers, showcasing states, cultivating PEV clusters, and restructuring recharging.

Motivate PEV Manufacturers

It takes a major effort to break into the established conventional vehicle market. In 2011, there were 18,000 PEVs sold in the United States out of 12.8 million new light-duty vehicles.¹⁰ Of that, General Motors sold 7,671 Volts, slightly below its goal of 10,000, compared to Nissan’s 9,674 Leaf sales.¹¹ It is worth noting that these PEV sales are nearly double the total number of hybrid vehicles sold in their full first year on the market—9,350 in 2000.¹² Positive signs for electric carmakers were seen in spring 2012. The Toyota Prius Plug-in, Ford Focus Electric, Honda Fit EV, and Mitsubishi-I (MiEV) joined the Leaf and Volt, soon followed by the Tesla Model S and Ford C-Max Energi. In 2013, the Chevy Spark EV, and BMW 1-Series ActiveE are expected. All in all, hundreds of companies are competing in PEV markets—from automakers to battery manufacturers to charging infrastructure specialists.¹³

The prevalence of new PEV models and the growth of the industry in such a short time is impressive. Still, much more needs to be done to realize the transformation to vehicle electrification. At present, PEVs remain a small niche market that needs policy support to survive and thrive. Figure 1 depicts the current position of the PEV market relative to fuel prices and battery costs. Though prices for energy storage are expected to fall in the years ahead, experts disagree over how far and how fast. Cheaper batteries could enable the broader adoption of electrified vehicles, potentially disrupting the transportation, power, and petroleum sectors and provoking backlash.¹⁴ Given these conditions, moving automakers into major PEV production will take a concerted effort.

Studies vary widely about PEVs’ future share of new vehicles, citing anywhere from 1 percent to 33 percent in the 2020–2030 timeframe.¹⁵ A recently released 2012 automotive executive survey by Booz & Co. underscores increasingly divergent outlooks for PEVs and other alternative drive trains,¹⁶ with 71 percent of respondents expressing less confidence in battery electric vehicles than in the previous year. Plug-in hybrids elicited a mixed response, with 55 percent of executives reporting increased optimism in 2012. Interestingly, 14 percent of executives of supplier firms expected the leading alternative powertrain in 2020 to be PEV, compared with 37 percent of manufacturers. An overwhelming share of suppliers—82 percent of respondents—is betting on full or mild hybrids as the dominant alternative technology by 2020.

There is widespread concern about the near-term viability of any alternative to the internal combustion engine without high levels of maintained government support. Although auto executives expect alternative powertrains to gradually gain market share, over half of those surveyed by Booz & Co. expect alternatives to represent less than 5 percent of the market in 2020, absent government incentives. In contrast, with continued government support, nearly 60 percent of those surveyed see a 10 percent or greater market share for PEVs and other alternatives in 2020.

While most do not expect government support to disappear over night, they are increasingly reluctant to make large investment decisions based on current policy. An indeterminate oil price outlook and looming budget decisions at both the federal and local level are often cited by industry as casting uncertainty on the future market penetration of electric vehicles.

Motivating PEV manufacturing and sales amid fluctuating oil markets will provide consumers long-sought-after new fuel options for personal mobility, and highly efficient electric-drive vehicles can reduce greenhouse gas emissions. But without continuing policy support, vehicle and fuel markets will likely embrace unconventional oils and advanced gasoline and diesel vehicle technologies. Should low oil prices emerge, they would likely deliver a crushing blow to PEVs and all other alternative fuels. Policy intervention is essential.

Reform the Electric Vehicle Consumer Tax Credit

PEVs cost more than a comparable conventional vehicle. The policy currently in place—the Qualified Plug-In Electric Drive Motor Vehicle Tax Credit—provides a $2,500 tax credit for vehicles with batteries of at least four kWh. As the battery gets bigger the credit steps up to a maximum of $7,500. While the Nissan Leaf and Chevy Volt qualify for the full $7,500 tax credit, the Toyota Prius Plug-in Hybrid only qualifies for $2,500 given its smaller battery. This incentive applies only to the first 200,000 cars sold for any given company.

Tax credits are limited to the tax owed in any given year. Whether a consumer gets the full EV tax credit comes down to household tax liability. For example, a consumer with a tax bill of $2,000 would forfeit the remaining $500 EV tax credit when purchasing a Prius Plug-in hybrid. It has been reported by tax experts that a married couple would have to make at least $74,300, after a standard deduction and have no other tax credits or dependents, to earn the full $7,500 tax credit on a PEV purchase. A single filer would have to earn at least $54,600. The median income for a single filer in 2011 was less than one-half that amount.¹⁷

Moreover, the tax credit is complicated and many people believe their new EV pricetag is lower than it actually is because they do not fully understand the details of the PEV tax credit calculation. Over time, complexity and inequity can reduce the effectiveness of PEV incentives.

As it is currently designed, a tax credit may not be the most equitable way to offer this benefit to the middle-income shoppers because only those in higher income brackets can benefit fully. This is the case because tax credits only offset tax liabilities. The lower the income, the less tax owed and the smaller the current benefit from the PEV tax credit. Tax rebates are paid to a taxpayer regardless of tax status, and a PEV tax rebate could better motivate those less-affluent individuals who would otherwise not purchase these vehicles.¹⁸

Incentives, if designed correctly, can influence consumer and manufacturer behavior. Issues of vehicle price appear to be salient concerns for mass-market adoption of PEVs. Other considerations entail giving the rebate directly to PEV manufacturers, as this might motivate automakers to invest greater amounts of capital sooner in PEVs than a consumer incentive that introduces uncertainty and a time lag in receiving the tax break.

Extend Federal PEV Policies to Encourage Industry Support

Automakers require market signals to spur transition in the motor vehicle market. Certain conditions are aligning that could prop up PEVs—higher gasoline prices and mounting public acknowledgment of climate change. At the same time, new oils are being discovered worldwide and Saudi Arabia is increasing its oil production to keep the price of oil at manageable levels, which means the uncertainty for market-driven PEV commercialization looms large.

Maintaining and growing federal support for industry and academia will be necessary to push manufacturers beyond niche vehicles and to bolster large-scale PEV commercialization. This includes grants and loans to industry, basic research and development support to academia and national labs, vehicle demonstration funds, support for charging infrastructure, market and other applied research, and grants for training and education, including emergency response, technician training, and other supporting roles.¹⁹

Engage Auto Dealers

Auto dealers play a central role in the commercialization of PEVs. They also tend to be politically powerful, because there are many of them and they are typically influential small business owners in their communities. Engaging auto dealers as PEV marketers and supporters of local PEV initiatives can be very helpful if those local actors endorse policies with their legislatures, disseminate information about new PEV options through advertising, and develop relationships with local utilities.

Carmakers’ marketing techniques can help transition consumers from one purchase behavior to the next through education, public relations, advertising, word of mouth, and social media. Automakers will need to work closely with dealers so that sales behavior meets customers’ expectations from first purchase to ongoing maintenance and repair.

In Arizona, for example, the state requires car dealers to make information about alternative fuel vehicles and Arizona-based incentives for purchasing or leasing alternative fuel vehicles available to the public. The state also created an Electric Vehicles Arizona stakeholder group to bring together auto dealers and other interested parties so that they better understand the opportunities and barriers that electric vehicles face in the state.

The abundance of potential product offerings still needs to be sorted out as consumers enter vehicle showrooms. Different EV technologies—battery electric vehicles, plug-in hybrids, battery EVs with small range-extender engines, fuel cell electric vehicles—should expand purchase options. Greater interaction between dealers and consumers, as well as their increased exposure to each other and to information, would do much to help break through the confusion, helping to increase sales and encourage manufacturers to press onward with commercialization.

Shine a PEV Spotlight on States

Many states have introduced their own incentive programs to encourage the production, purchase, and use of electric vehicles. The most popular policy instrument used by states is a tax incentive aimed at reducing the incremental cost of purchasing an electric vehicle. In addition, many states provide grants and loans to local governments to promote use of PEVs, and provide funds to electrify school buses, purchase PEVs for municipal fleets, and install recharging infrastructure. As such, states play a major part in PEV commercialization. Showcasing this role and its benefits could help disseminate PEV policies nationwide.

Showcase States Leading on Low-Carbon PEVs

Meeting the greenhouse gas reduction target for vehicles of 80 percent by 2050 depends on expediting the adoption of zero-emission vehicles, taking into account vehicle turnover and historical experiences in commercializing new technologies (such as gasoline hybrid cars). According to a scenario adapted from the California Air Resources Board, nearly all light-duty vehicles—87 percent in the scenario in figure 2—must shift to PEVs by 2050 to reduce greenhouse gas emissions by 80 percent. Although uncertainty remains about the exact future mix of PEVs in the marketplace, this particular scenario is based on a tipping point between 2025 and 2030 at which more than one-half of light-duty vehicles are PEVs or fuel-cell electric vehicles. The actual mix will depend on manufacturer and consumer choices, guided in part by energy economics and relative technological progress on PEVs. It is important to acknowledge that the categories below camouflage a rich mix of technologies that underpin vehicle electrification.²⁰

Though California has taken the lead in this area, other states have followed thanks to a special provision in federal law. Ten states have adopted California’s zero-emission vehicle program under the Clean Air Act (Section 177), which allows other states to adopt California’s vehicle regulations. These Section 177 states are Vermont, Oregon, Connecticut, Maine, New Jersey, New York, Rhode Island, Massachusetts, Maryland, and New Mexico.

These states do not have uniformly low-carbon electricity footprints despite the fact that they are all advancing PEVs. The carbon footprint of PEVs is largely determined by the source of power they use for recharging. In terms of the carbon intensity of electricity generation (in kilograms of carbon dioxide per megawatt hour), Vermont has by far the lowest carbon intensity—by an order of magnitude less than other states.²¹ Washington and Oregon come close but have more than double Vermont’s low levels. Connecticut, Maine, New Jersey, New York, and Rhode Island all rank better than average in terms of electricity-generation carbon intensity. Several non–Section 177 states—including New Hampshire, Arizona, South Carolina, Idaho, and Alaska—also have low-carbon emissions compared to the national average (see table 2 for state rankings). Policy efforts in support of PEVs could focus on those states with the greatest potential to deliver carbon reductions.

Benchmarking and geographically targeting states with the lowest carbon emissions from electricity generation could help focus PEV-adoption policy efforts. Policy (and advocacy) priorities can be based on how each state currently measures up and on which policies it has in place to further reduce carbon emissions from its electricity grid. Electricity supply policies on the demand side include electricity efficiency programs, and on the supply side, clean energy standards, renewable portfolio standards, and energy efficiency resource standards.

An extensive array of state PEV policies in place, including HOV lane and emission test exemptions, monetary and parking incentives, and the availability of EV charging stations, is reviewed in the Appendix.²²

Advance PEVs in Uncommitted States

PEVs are generally associated with environmental benefits and are thus not at the top of the agenda for every decisionmaker in every state. But a small investment in broadening PEV advocacy programs could go a long way. PEVs present a job-boosting, revenue-generating, and technology-enhancing economic opportunity that could situate states for long-term gain. For example, electric vehicle charging hardware and software revenues are forecasted to amount to some $6 billion by 2017.²³ Such a large dollar amount indicates that PEVs are big business from which states can derive future economic benefits.

Moreover, the potential to reduce fuel costs could appeal to uncommitted regions that tend not to put the environment at the top of the agenda. Consumers in some states pay a larger share of their income for gasoline than others.²⁴ And gas prices vary widely from state to state—for example, gasoline prices in California and Wyoming are over $1 per gallon apart.

Political swing states—Florida, Pennsylvania, Ohio, Michigan, North Carolina, Virginia, Wisconsin, Colorado, Iowa, Nevada, New Mexico, and New Hampshire—may be particularly good candidates for PEV policies.²⁵ Some states are leading the charge. Arizona, for example, requires state boards and commissions to purchase PEVs and other low greenhouse gas fleet vehicles, offers PEV access to high-occupancy vehicle lanes and carpool parking spaces, and provides tax credits for vehicle purchase and recharger installation. Likewise,