Q&A: New incentives could electrify the car market, but old roadblocks remain
California approved regulations banning the sale of new gasoline-powered cars and trucks by 2035, an action aimed at addressing climate change that could speed the nations transition to electric vehicles. How will incentives from the Inflation Reduction Act affect the hot electric vehicle market? USC Assistant Professor Hovig Tchalian weighs in.
The passage of the Inflation Reduction Act boosted incentives for car-hungry Americans to buy electric vehicles. For the next ten years, electric vehicle buyers will continue to get up to $7,500 in tax credits toward new cars, while used EV purchases will be eligible for $4,000. The fine print is extensive. The source of the parts, point of assembly, vehicle price, manufacturer, and the potential car buyers income all factor into the EV equation.
Hovig Tchalian is an assistant professor of clinical entrepreneurship at the USC Marshall School of Business studying the way new technologies impact the processes of market emergence. We spoke with him about how incentives might affect the EV market at a time of high gas prices and supply shortages.
What is the current status of the EV market?
(The electric vehicle) is one of those product categories thats taken a long time for people to get used to, so its fragile. Rising gas prices have spiked demand recently, but its been a nascent market for a long time: Its been the next big thing for a hundred years. If you go back to the 90s, the GM EV-1 was supposed to break through. Then it was the Nissan Leaf. Then it was Tesla.
A lot of manufacturers followed Tesla in the early 2000s aiming at the higher end of the market. These vehicles cost more to make.
Also, in the early 2000s they marketed them as sports cars, not EVs. These are really fun to drive, and your neighbors will gawk at you for having the first one on the block. It happens to be electric, which just makes it faster. Zero to 60 in under four seconds. Go buy one. Theyve now tried to move downmarket because you cant do that forever. But it is fairly expensive to get the technology right, to get these things to work.
Now were at double digit demand for EVs globally, but for the longest time it was stuck at one or two percent.
Maybe were at an inflection point, where incentives matter even more. I appreciate that policymakers are actually trying to do something about this, but its very difficult to get it right.
Will the incentives included in the new bill mean more electric cars in consumers driveways?
Thats something economists will debate. Generally, it will push it up. The question is how much. It’s less a question of simply giving people incentives. It’s more that several things have to line up. Think about how you and I make buying decisions for cars. The questions we ask. Is it going to get the right fuel economy? Do I look cool driving it? Can I afford it? Its not just the price.
Incentives solve one part of the EV puzzle, but you still need to solve the other: adoption.
For most car buyers, EVs are unfamiliar. Theres anxiety about range, the number of charging stations and the time it takes to recharge. There were some recalls. The earlier Tesla models had a transmission issue.
If I show you a new electric, self-driving car that has risks, youre much less likely to adopt unless youre one of those people who stand in line for hours to get the latest Apple product. People still have doubts. A rebate or incentive doesnt change that.
A lot of this is behavioral. Its not so much the economics alone or the infrastructure. Its asking people to change their behaviors. The more you ask people to change their behaviors the more difficult it is for these technologies to get adopted.
Car buyers are paying an average of $54,000 for an EV. How do high EV prices factor into the equation?
It’s difficult for somebody who is making $30,000 or even $50,000 a year to buy one of these. The economics don’t necessarily work out.
What will hold back the overall impact of the incentives is the amount they offer in relation to the price. If its going to cost you an extra $2,000 to buy an electric car and you get a $2,000 rebate, the incentive has zero effect.
Is pricing as easy as subtracting the incentive from the sticker?
Theres confusing messaging and ongoing changes. For instance, there are multiple rebates especially in California. Not all vehicles qualify. Its not just about where the parts are made.
Once a manufacturer produces 200,000 units such as Tesla or GM they no longer qualify for federal incentives.
It throws a bit of a wrench in the works when people are trying to buy. Theres enough for people to worry about when they adopt an EV: Its unfamiliar, its unusual and they have range anxiety about running out of charge. You have to go to a different mechanic. People are afraid theyll get stuck without a charge driving to work.
Do you drive an EV?
We bought a used 2013 model a few years back. New, it sold for $32,000. We picked it up four years later with 25,000 miles on it for $8,000. It was an earlier model. The range was only 65 miles. The battery started to go so we eventually had to give it up but were looking at possibly getting another EV.