California’s EV Rebate Changes: A Good Model For The Federal EV Tax Credit

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Effective December 3, California’s Clean Vehicle Rebate Project will see two key changes, with the net effect being that 13 currently available electric vehicles will no longer be eligible for rebates. These changes in the California rebate program also can serve as a model for improving the federal EV tax credit.

As background, the Clean Vehicle Rebate Project (CVRP) promotes clean vehicle adoption in California by offering rebates of up to $7,000 for the purchase or lease of new, eligible full electric (BEV), plug-in hybrid electric (PHEV), and fuel cell electric (FCEV) vehicles, as well as zero-emission motorcycles. The CVRP has “Increased Rebate” amounts for California residents whose household incomes are less than or equal to 300% of the federal poverty level. Current and future standard and “Increased Rebate” amounts are:

Besides the reduced rebate amounts, the two key changes in the program are related to Vehicle Eligibility Criteria:

• An MSRP cap of $60,000 will be instituted on all vehicles with the exception of fuel cell electric vehicles.
• The Urban Dynamometer Driving Schedule (UDDS) all-electric range requirement for plug-in hybrid electric vehicles will be increasing from 20 miles to 35 miles. (UDDS is commonly called the “LA4” or “the city test” and is different from the commonly used general EPA range for EVs. The CRVP 35-mile UDDS electric range requirement for PHEVs seems to equate to roughly 23-24 miles of EPA range. Under the UDDS standard and new CRVP requirements, the Toyota Prius Prime with 25 EPA miles makes the cut, but the Mitsubishi Outlander PHEV with 22 miles does not.)

The result of these two changes are that 13 EVs that are currently available in the US and California will no longer be eligible for rebates. (Note: CRVP lists the two BMW 530e models separately, but I’ve combined them as a single model.) There are 11 other EV models that for various reasons were already not eligible for the CRVP rebates — you can see my sortable list here. The EVs no longer eligible are:

1. Audi e-tron (exceeds $60,000 MSRP)
2. BMW 530e iPerformance / 530e xDrive iPerformance (below 35 miles UDDS requirement)
3. Karma Revero GT (exceeds $60,000 MSRP)
4. Jaguar I-PACE (exceeds $60,000 MSRP)
5. Mitsubishi Outlander PHEV (below 35 miles UDDS requirement)
6. Subaru Crosstrek Hybrid PHEV (below 35 miles UDDS requirement)
7. Tesla Model S (exceeds $60,000 MSRP)
8. Tesla Model X (exceeds $60,000 MSRP)
9. Volvo S60 T8 (below 35 miles UDDS requirement)
10. Volvo S90 T8 (exceeds $60,000 MSRP + below 35 miles UDDS)
11. Volvo V60 T8 (exceeds $60,000 MSRP + below 35 miles UDDS)
12. Volvo XC60 T8 (exceeds $60,000 MSRP)
13. Volvo XC90 T8 (exceeds $60,000 MSRP + below 35 miles UDDS)

Why is the California Air Resources Board implementing these changes? According to the CVRP site:

“With an increasing program demand that exceeds the current program budget, the California Air Resources Board approved changes to ensure that this year’s funding allocation provides a meaningful incentive to encourage EV purchases while maintaining a program that is viable for a longer portion of the upcoming year.”

So, it appears that the changes were fundamentally budget driven to ensure that the program could actually fund all of the rebate requests. But I strongly believe that the two changes in vehicle eligibility criteria were overdue anyway, and in fact, could and should serve as a model for changes to the federal EV tax credit. 

Model Federal EV Tax Credit Changes After the CVRP Changes

In my November 17, 2017, CleanTechnica article “7 Potential Revisions To Federal EV Tax Credit,” two of my suggested changes included implementing minimum MPGe (e.g., range) and maximum MSRP thresholds. The future of the federal EV tax credit, which I believe has multiple flaws and needs to be torn up and completely rewritten, is at risk and may not be extended by Congress. One (among may) of the ways to reduce the negative bias by many against the tax credit and then actually design it to more strategically increase EV sales is to implement similar range and MSRP requirements as California has done.

Minimum Range for PHEVs — Change #1

As mentioned above, the UDDS (city-driving testing standard) 35-mile electric range requirement for PHEVs seems to equate to roughly 23–24 miles of EPA range.

The current median range of PHEVs in the US is 21 miles and the average is 21.6 miles. Allowing PHEVs with a range of less than 25 miles of EPA range to qualify for the federal EV tax credit is simply a poor use of taxpayer dollars and rewards automakers for producing lower-range EVs. Implementing an electric range minimum such as 28–30 miles should be an absolute requirement for a revised tax credit. The minimum range could then be adjusted upwards 1 mile every year or use some similar approach.

Currently, in the US, five PHEVs would meet a 28 mile EPA range minimum: Hyundai IONIQ PHEV (29), Kia Optima Plug-In Hybrid (29), BMW 530e (30), Chrysler Pacifica Hybrid (33), and Honda Clarity PHEV (47). But the upcoming Toyota RAV4 PHEV, with an expected 39 miles of range, and Ford Escape PHEV, with an expected 30 or 31 miles, would make the cut for a total of seven eligible PHEVs. The currently available BMW 740e xDrive (28 miles) and the upcoming in 2020 BMW X5 xDrive40i (30 miles) and Polestar 1 (65 miles) would not be eligible under my MSRP cap below. 

Establishing a minimum EPA range requirement in the 30-mile neighborhood would hopefully motivate OEMs to get serious about the range in plug-in hybrids and stop producing those with well under 30 miles of range. A range of ~30 miles will satisfy the daily driving needs of many households. And for those with long commutes, with this level of range, they can hopefully charge at their workplace or other location and be able to return home in electric-only mode.

MSRP Cap — Change #2

The importance of a cap on the MSRP of eligible EVs is partially one of politics and perception. The top talking point among the anti-EV and anti–tax credit folks is that taxpayers are basically paying for upper income people to buy expensive luxury cars. And I’m sorry, but they are right.

People who can afford to buy or lease a car that costs $80,000 should not be receiving assistance from the government to do so. The households that can afford expensive EVs don’t need tax incentives to do so. These types of incentives may encourage them to make such a purchase, but they don’t actually need the financial incentive. According to CRVP statistics, since November 2016, only 14.1% of rebates have gone to low- to moderate-income households.

California chose an MSRP cap of $60,000, which seems to be a reasonable limit based on the current availability of affordable EVs and median sales price of vehicles in the US. The current average and median MSRP of EVs available in the US is roughly $53,000 and $40,000, respectively.

Rather than pick a random number, it probably makes sense to develop a simple formula that might combine the median MSRP of EVs and that of non-electric vehicles. According to Kelley Blue Book, the average transaction price of a vehicle in the US in August was $37,401. There are currently 22 EVs priced at or below $37,500 in the US and 22 above this level. 

A simple approach could be to add $10,000 to the average non-EV transaction price from the previous year to create the EV tax credit eligibility cap. At the current levels, this equates to a cap of $47,500, at which 27, or 61%, of the currently available EVs would qualify. The price delta could then be reduced by $1,000 each year — reaching zero after 10 years. Whether this formula makes sense or is roughly the right price point, we can debate, but I stand by the need for a cap.

I know many CleanTechnica readers will violently disagree with me, believing that we are in a climate crisis and we need to do whatever we can to increase sales of EVs, especially in the US where sales are lagging. And that secondly, we shouldn’t kowtow to politicians, oil companies, and others who are against EV incentives and who push the “EVs are toys for rich people” narrative. 

And I understand those views. But I believe that reducing the “easy to attack” aspects of the tax credit can help ensure it survives and will actually do a better job of driving mainstream adoption of EVs — not just increasing sales among early adopters. But beyond the narrative issue, fundamentally, the focus of the federal tax credit should be on putting more middle- and lower-income households behind the steering wheel of an electric vehicle.

BTW, while the focus of this article was not about the potential impact the CRVP changes will have on EV sales in California, I wouldn’t expect the CVRP changes to reduce EV sales in California by any significant level. We could perhaps see a decline in annual sales of 5,000–10,000 at most, but I expect the more likely outcome is that consumers will simply shift which EVs they decide to buy or lease.