Topic Area: Air Pollution / Transportation
Geographic Area: California, USA
Focal Question: Have federal, state, and local economic incentives been successful in promoting the sales of zero emission vehicles (ZEVs) in California?
Sources:
(1) The California Air Resources Board, http://arbis.arb.ca.gov
(2) Interview with Tom Evashenk of the California Air Resources Board
(3) The Environmental Protection Agency, http://www.epa.gov
(4) Calstart News Center, http://www.calstart.org
(5) Activists Corner, Transportation, http://www.ucsusa.org
Reviewer: Benjamin C. Sigman, Colby College '99
Review:

During the late 1980s it became clear that California's growing air pollution problem could not improve without some very substantial changes. Motor vehicles were targeted as being a major contributor to this problem due to the fact that conventional gasoline-powered and diesel vehicles constitute over 60% of the smog-forming pollutants in California. This fact spurred a move to evaluate various solutions to the mobile source air pollution problem. One of the most progressive solutions put on the table was further development of the zero emission vehicle (ZEV). By 1990, the California Air Resource Board (CARB) had determined that even significant improvements in gasoline and diesel powered combustion engines could not possibly make them clean enough to meet the stringent reductions in air pollution mandated by the state of California. Either driving would have to be restricted or a switch to nonpolluting vehicles would have to be made. CARB decided that a switch to vehicles without tailpipe or evaporative emissions made the most sense and adopted the Low Emission Vehicle and Clean Fuels regulations.

The Low Emission Vehicle and Clean Fuels regulations included requirements which outlined ZEV production for the seven largest auto producers through the year 2003. According to the original plan, ZEVs would constitute 2% of total production in 1998, 5% in 2001, and 10% in 2003 and beyond. However, the interests of car manufacturers and oil industries were acknowledged in a court decision which modified the requirements. The 1998 and 2001 requirements were changed to a fixed 3,750 vehicles in each year. The original ten percent requirement for 2003 was not changed.

In order to help auto manufacturers meet these regulations, economic incentives were created on the federal, state, and local level. These incentives were adopted in order to help off-set the cost of such an expensive change in technology. The lead-acid, nickel-metal hydride, and lithium ion batteries presently being used in ZEVs are still in the development stage and are being produced in very limited quantities causing their price to remain extremely high. For this reason, the government introduced incentives which attempt to bring the price of the ZEV to a level comparable with conventional vehicles in order to ensure that auto manufacturers are able to sell their prototype vehicles and meet the requirements set for 1998, 2001, and 2003.

The first incentives, adopted in 1992, were at the Federal level. The government offered a 10% tax credit (up to $4,000) on the cost of a ZEV. The federal incentives also included a $100,000 business tax deduction for electric recharging facilities. In addition, the Energy Policy Act of 1992 provided a ten year $50 million electric vehicle demonstration program and a fifteen year $40 million cooperative program between government and industry to research, develop and demonstrate electric vehicle infrastructure. Finally, the federal government eliminated the luxury tax on alternative fuel vehicles.

California's state incentives on ZEV began to emerge in 1995. The California Energy Commission began funding the electric vehicle loan program which provides an electric vehicle, charging infrastructure and technical support to representatives of local public agencies interested in possibly converting their fleet to ZEVs. In addition the California Energy Commission and the US Department of Energy now provide up to $5,000 (cap of 200,000 vehicles) of the incremental cost of an electric vehicle for fleets located in specific high pollution cities.

Many local incentives for ZEVs have also been established over the last two years. The South Coast Air Quality Management District, which includes Los Angeles, and the San Diego Air Pollution Control District offer a $5,000 rebate on each electric vehicle sold before 1999. In addition the Los Angeles Airport offers free parking and charging for ZEVs in its central terminal. Local utility providers also offer incentives to purchase ZEVs. Edison International offers $3,600 to any employee interested in the lease or purchase of a ZEV. The Los Angles Department of Water and Power, San Diego Gas and Electric, Sacramento Municipal Utility District, and Pacific Gas and Electric all offer discounted electricity rates for recharging during off-peak periods.

In analyzing the success of these incentives it is important to first see that the incentives fail to make the price of a zero emission vehicle comparable to conventional vehicles. Because the battery technology is so new the price has remained very high. These batteries cost between $30,000 and $50,000 which keeps the retail price of these electric vehicles between $50, 000 and $60,000. The available incentives usually provide $9,000 (the sum of the $4,000 federal incentive and the $5,000 state or local incentive) off the price of a ZEV. Unfortunately the incentives still leave the price of a ZEV significantly higher than that of a conventional vehicle. In leasing a ZEV, which is far more common than purchases, the incentives can hardly be realized. They are subtracted from the sticker price of the vehicle and serve to lower the monthly payment only very slightly. On average ZEVs still cost about $450 per month including the incentives. Some manufactures such as Honda and General Motors are leasing electric vehicles at more reasonable monthly rates making the electric vehicle a more realistic choice but this is due to more efficient production. Overall ZEVs are so expensive that even with incentives the vehicles remain in same price range as a luxury automobiles.

Because the available incentives do not serve to bring the price of a ZEV down to a level comparable with the average gas-powered vehicle, they do not serve to significantly increase the quantity of ZEVs demanded. This means that the incentives are not realized by the consumer. The environmentally concerned upper middle class consumer who leases a ZEV would probably have done so even if the incentives did not exist. It is very unlikely that a rational consumer who is not particularly environmentally concerned would lease an electric car for $450 per month, especially when one considers that the average ZEV only gets around 100 miles per charge. These cars are not yet practical in terms of price or utility. At this point, consumers must have a high willingness to pay for environmental improvement in order to even consider leasing a ZEV.

It is also important to note that the supply of ZEVs is presently incapable of accommodating further increases in demand. If the incentives were any stronger, runaway demand might result. Presently, very few ZEVs are being efficiently mass produced and capacity constraints exist which limit the desired effect of incentives. Production numbers will remain low as manufactures continue to improve their technology. So far these manufacturers are only attempting to meet the requirements adopted by the CARB. As production of ZEVs matures and the price of the technology falls, the auto industry will be able to supply more vehicles at a lower price. Until then, enough environmentally conscious individuals with relatively high incomes have to be willing to purchase ZEVs at the available high price. So far, manufacturers have been able to sell all of the ZEVs that they have produced despite this prototype price. So, despite the fact that the incentives did not bring price down enough to create a rational decision between a ZEV and a conventional vehicle, they still improved the price of ZEVs slightly and have served to aid manufacturers in covering some of the expenses of small-scale ZEV production .

The incentives which have been provided for the three thousand ZEVs on California's roadways today have helped the auto industry with its transition to electric battery technology. When a car is leased, the $9,000 in available incentives goes straight to the auto manufacturer. This has made the prospect of actually selling these electric vehicles more realistic but has also served simply to cushion the manufacturer. In addition to federal funds received from the Department of Energy, the incentives are essentially a means of reducing the financial burden resulting from a significant change in technology. Even with the softening of the original Californian ZEV requirements, it is still a very difficult change for these producers to make. With production still at prototype levels and battery technology just now becoming realistic, the available incentives help carry the burden of the expensive change to the production of electric vehicles by supplying the manufacturer with $9,000 from the government for each ZEV that they sell.

It is clear that once this difficult transition is over, the mass production of ZEVs will make these vehicles available to the middle class consumer without incentives and California will finally have a chance to achieve a more sustainable level of air pollution. Presently only five percent of Californians live in areas which meet the state's standards for clean air and moving to ZEVs will allow for the improvement of this figure. Battery powered zero emission vehicles are significantly cleaner than any other vehicle. The average vehicle produces 580 pounds of smog-forming gasses (ROG +NOx) while electric vehicles produce less than 5 pounds of smog-forming gasses (this includes the power plant emissions which result from recharging ZEVs). With the total emissions of a ZEV being less than one hundredth of the average vehicle, achieving the ten percent ZEV regulation in 2003 and beyond will allow for sustainable healthier air in California. Government intervention is necessary to make this change feasible and federal, state, and local incentives have been a successful method of supporting auto manufacturers compliance with California's transition to the ZEV. Despite the fact that these incentives have not boosted sales or lowered price significantly they do serve to inject public funds into an industry which would have had a very hard time initiating such a transformation without financial assistance.