CMU study finds small battery PHEVs and hybrids the least-cost policy solution to reducing gasoline

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If the purpose of existing federal PHEV subsidies is to reduce gasoline consumption, this implies that the policy subsidizes 4 kWh battery PHEVs at ~$1.25 per gallon saved while subsidizing 16 kWh battery PHEVs at roughly $4.50 per gallon saved, ignoring indirect effects. It is clear that federal subsidies are not currently aligned with the goal of decreased gasoline consumption in a consistent and efficient manner. Other relevant policy objectives, including reduction of emissions externalities, encouragement of technology development, and job creation do not show clear benefits of favoring large battery packs over small battery packs.

The authors suggest that redesigned policy should consider:

• Subsidize usable capacity, rather than total capacity. The Chevy Volt, for example, uses only about 65% of its 16 kWh capacity in order to improve safety and battery life. However, current federal subsidies are tied to total battery capacity rather than usable battery capacity or AER—i.e., it incentivizes the use of larger battery packs.
  Subsidizing usable capacity would remove the disincentive for automakers to figure out how to use a larger portion of the battery. Alternatively, subsidizing based on AER (as measured in a standardized test) would also encourage automakers to make vehicles more efficient, and removing the exclusion for lower-capacity lower-range vehicles would be more consistent with potential benefits.
• Subsidize estimated gasoline savings rather than battery capacity or AER. PHEVs have diminishing returns in gasoline savings as battery capacity increases. Subsidies intended to generate gasoline savings would be better if tied to estimated gasoline savings rather than battery capacity or AER, the authors suggest, and subsidies that are tied to battery capacity or AER should avoid a fixed rate per kWh or per mile and instead reflect the structure of diminishing returns.
  However, they add, methods for estimating gasoline savings may be controversial, and depending on what reference point is used, subsidies tied to gasoline savings could have unintended consequences, such as the potential for separate reference points in each vehicle class encouraging consumers to purchase larger vehicle classes.
• Consider temporary larger subsidies. The current subsidy of $2,500 for 4 kWh (~$1.25/gal saved) and $7,500 for 16kWh (~$4.50/gal saved) pays prices substantially higher than US oil premium estimates of $0.37/gal ($0.08–$0.96/gal). Subsidies intended to generate gasoline savings would preferably be comparable to the social value of gasoline savings (and the value of other social benefits). To the extent that larger subsidies are able to kick-start adoption and sustainable market acceptance of plug-in technologies that would not otherwise be adopted, temporary larger subsidies may be warranted. But the magnitude or duration of this dynamic effect remains highly uncertain.
• Target the goal, not the technology. More efficient policies generally target the policy goal, such as gasoline displacement, directly rather than a proxy, such as battery size.
  On economic efficiency grounds, subsidies are justified insofar as they correct for positive externalities, such as innovation knowledge spillover, and research funding is an alternative to subsidizing sales for achieving this effect.
  A more efficient way to address negative externalities is to apply Pigovian taxes (e.g., a carbon tax), which would increase the price of gasoline and make plug-in vehicles more competitive in the marketplace while encouraging the most efficient responses to reducing externalities, including not only alternative powertrains but also efficiency improvements and incentives to drive less and purchase smaller vehicles (as well as to make changes in other sectors of the economy). They authors acknowledged the political challenge of increasing or creating a tax.
• CAFE. Considering the presence of binding CAFE standards, the authors raised the question of whether EV subsidies will provide any net gasoline savings for the foreseeable future

Ignoring interactions with CAFE policy, HEVs and PHEVs with low AER and only home charging generally provide the largest direct gasoline savings per dollar spent, offering both lower costs and lower gasoline consumption than CVs, depending on the consumer’s discount rate. It is therefore possible that incentivizing a larger number of consumers to purchase HEVs or low-AER PHEVs would save more gasoline under a fixed policy budget than incentivizing a relatively smaller number of consumers to purchase high-AER PHEVs. However, given a fixed market of electrified vehicle adopters, if more gasoline savings is needed than what can be achieved with HEVs and low-AER PHEVs, additional savings can be achieved more efficiently by paying for additional AER than by paying for extra charging infrastructure.​

Comparison of current federal subsidy to base case assumptions showing lifetime fuel savings

 

It is not just about gas saving. They also took account of emissions and social benefits as well (if not in this one, in previous paper). I thought their suggestions for improvements are sound and not bias. Focusing on goal instead of technology is what I have been saying.

What's wrong with subsidized HEV? It represents 3% of the market. If it reaches the goals, it deserves the incentive. We need more people saving gas, reducing emission, increasing energy security, etc...

 

I think the assumption is sound because the goal of the prior successful federal subsidies (for HEV) was to reduce gasoline consumption. The amount qualified was based on the difference in MPG rating from EPA.

There are separate subsidies for R&D and manufacturing. Are they not enough? Then increase it there. If it is not possible then, that technology is not ready.

The incentive for buyers have always been for the purpose of saving gasoline (hence reduce emission). Sure, it also helped to offset the extra cost but the amount was tied to the goal (not specific technology).

 

Yea, that's what it looks like to me as well. Battery R&D are coming out from DOE labs. LG Chem was given a license (undisclosed) to manufacture it. They get subsidies (per cell) to manufacture it. Is that not enough? As you pointed out, Nissan also get cheap loans and state incentives to build motors and batteries in the US so it cannot prevent subsidies from going to foreign companies.

Why do we need to give out another $7,500 consumer incentive without any attachment to the goal of reducing gasoline?

Gas can be saved two ways. 1) Increase gas engine efficiency. 2) Displace it with electricity using battery. The prior HEV tax credit focused on #1. The current tax credit focus on #2. For pure BEVs, focusing on just the #2 is valid.

However, for plugin hybrids that use both fuels, both goals #1 and #2 are needed. Focusing on the battery size alone is not going to be effective (nor focusing just on #1). Gas engine efficiency is equally important. I think the author's suggestions for a redesigned policy makes sense.

 

A new study from CMU together with Ford says the same thing. Plugin with a small battery is best due to the carbon concentration in the current grid. HEVs provide the best bang for the incentive buck at the current gas price.

This research was supported by National Science Foundation grants from the Foundation’s Material Use, Science, Engineering and Society program, the CAREER program, and the Graduate Research Fellowship program. Support was also provided by Ford Motor Company, Toyota Motors of America, and the Steinbrenner Graduate Fellowship.​

 

That's fine as long as it is tied to the goal and not a specific technology (battery size).

So, gasoline gallons saved was indeed the goal. CO2 output is directly related to the amount of gasoline burned. A gallon of gas (about 6 lbs) produces 20 lbs of CO2 (factor of about 3x), no matter how you combust it.

 

It would be best if tax credit works at individual level. I don't think it would be plausible so the best is going by the EPA figures.

 

I agree on the quality and the need to prove that it works with the early adopters. Should the incentive amount be sized for the early adopter or the mass market?

I think the current $7,500 tax credit for 200,000 vehicles (another 200k at half the amount, then another 200k at 1/4) is sized for the mass market, skipping the early adopter stage.

In the meantime, other technologies (HEV, Diesel, etc) are ignored. I am not against incentives for the plugins. I think it needs more support because it is a nascent technology. I just think some of the money could go toward other technologies that could also save gas, hence not ignoring the goal (and not picking winners and losers).