Axing $7,500 incentive could disrupt EV market

Tom Randall
Bloomberg News

Are electric cars ready to stand on their own?

Edmunds, the car-research company, recently warned that the elimination of a $7,500 U.S. tax credit is “likely to kill one-eighth to three-eighths of the U.S. EV market.” Edmund spinned its argument on what happened in Georgia, a state that became an unlikely leader in electric cars thanks to an extra $5,000 incentive.

But a very illuminating thing happened after Georgia's incentives expired. Unlike the Nissan Leaf, which made up the majority of the EV market there, sales of electric-luxury Teslas were barely affected by the loss of the tax credit. In fact, more people are buying Teslas in Georgia today than during the subsidy years.

Unlike the Leaf and the BMW i3, the Tesla Model S is quicker than similarly priced gasoline cars, has a long driving range,extensive fast-charging network, and is packed with unrivaled tech advances like Autopilot and wireless software updates.

As a result, the Model S is now the best-selling large luxury vehicle in America. Changes to state or federal incentives are unlikely to alter that fact. But those Teslas are premium cars that start around $70,000. For plug-ins to really pass the subsidy test and take over the auto industry, they’ll need to prove themselves in cheaper classes of car.

The primary cost for an electric car is its battery, responsible for almost half the price tag of a mid-sized plug-in. If you take that away, electric cars are much cheaper to produce and maintain than internal combustion vehicles.

For true mass-market appeal, the up-front sticker price matters most, and battery prices must come down further. Prices are falling by roughly 20 percent a year. The manufacturing cost of electric cars will fall below their gasoline counterparts around 2026, according to an analysis by Bloomberg New Energy Finance.

The $7,500 federal incentive is set to taper off as each manufacturer reaches its 200,000th U.S. sale. For Tesla, that day will arrive sometime next year. Nissan and GM won’t be far behind and any extension of the subsidy by the Trump administration seems unlikely.

Tesla, the first to approach price and function parity in the Model S sedan and Model X SUV, will attempt to recreate that magic later this year with the Model 3, a $35,000 entry-level luxury sedan. The $37,500 Chevy Bolt is already available in some markets in the U.S., and should be available nationwide by summer. A longer-range Nissan Leaf will be unveiled in September, and depending on its price tag, it could begin to approach the parity zone in the sub-$30,000 market.