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Should We Pay People to Drive Their Electric Cars?

The EPA considers subsidizing electric fuel.

Over the last several years there has been a lot of excitement about the potential growth of the electric vehicle (EV) market. Much attention has been devoted to recent efforts to direct large amounts of public funds to subsidizing the purchase of EVs, and the installation of EV charging stations. In addition to the more widely publicized vehicle subsidies and infrastructure investments, there has been a more subtle incentive directed at the EV market, namely rewarding firms for selling the electricity that goes into EVs. 


The main policy that has been subsidizing juice for EVs has been California’s Low Carbon Fuel Standard (LCFS). But now, there are several reports that the U.S. EPA will add electricity as a clean fuel eligible for credits under the Federal Renewable Fuel Standard (RFS) program. Historically, both programs have been more widely known for boosting sales of biofuels like ethanol and renewable diesel.  

Normally, subsidizing firms to sell a fuel would lower the price of that fuel for consumers, and maybe that will happen in this case. But, somewhat strangely, to date, these policies haven’t seemed to meaningfully lower the electricity prices paid by drivers. The reasons are complicated, and we explore them in this report. It is worth asking, as well, do we even want to make it cheaper for people to drive their EVs?

The general idea behind both the LCFS and the RFS programs is to require firms that market gasoline and diesel to blend increasing amounts of “clean” fuels into the products they sell. By mixing in ethanol or renewable diesel, the average carbon content of a gallon of fuel goes down. Because biofuels are still, usually, more expensive to produce than traditional petroleum fuels, these programs also tend to modestly raise the price at the pump for blended fuels while generating large amounts of revenue for biofuels producers. The price of biofuels goes down, but the price of the combination of petroleum and biofuel goes up.

While petroleum companies periodically grumble about these costs, the concern of environmental economists has been that these approaches didn’t raise gasoline costs enough. After all, driving creates all sorts of external costs, including air pollution of course, but also traffic congestion and fatalities. Most drivers ignore these costs and the result is too much pollution, traffic, and deaths on the road.

Unlike the RFS, the LCFS has always allowed credits to be generated not just through blending biofuels into the traditional fuel stock, but also by selling “alternative” fuels like hydrogen or electricity. These alternatives stand apart in that they don’t directly displace liquid fuels in the same cars, but rather require entirely new types of cars to utilize those fuels.

Why would we want to subsidize the cost of driving electric vehicles? The main answer is to make EVs more attractive than gasoline-powered vehicles. One would think that lower electricity prices would stimulate EV demand, but my work with Dave Rapson and Erich Muehleggar indicates that EV vehicle demand is much more sensitive to gasoline prices than to electricity prices.  

The operating assumption behind awarding clean fuel credits to electricity is that a mile driven by an EV displaces a mile driven by a gasoline-powered car, thus reducing carbon emissions by a little bit. If the cost of “clean” fuel is more than plain gasoline, total driving should also go down. But unlike biofuel mandates, which still raise the cost of driving, subsidizing juice for EVs could make driving really cheap.

The math, and the implications of it, can look strange at times. Up until this year’s precipitous decline in LCFS credit prices, the value of the LCFS credits generated by selling a kWh to charge an EV in California was close to the retail price of power, and up to 3 to 4 times the actual cost of producing that power.   Boosting electricity values by adding on an RFS credit on top of the LCFS could very well return us to a situation where firms can make money by giving away electricity to drivers, or even paying drivers to take it. The more EVs drive, the more money to be had through credits. In 2019, when LCFS credit prices were in the $200 per ton of CO2 range, a firm could have easily made money by driving EVs around a track on auto-pilot and recharging them with “clean”’ electricity that was more than paid for by LCFS credits.  

Another problem that the LCFS has struggled with is that it can be surprisingly difficult to measure the electricity that goes to cars, as opposed to say, air conditioning. It is not clear yet what the EPA plans to do.

Such an alice-in-wonderland result highlights the tenuous logic behind clean fuel subsidies: that paying people to use clean fuel will automatically reduce the use of dirty fuel, rather than just expand the combined use of fuels. Ultimately, we don’t want people to drive EVs more, we want people to burn less gasoline.  Subsidizing electricity for cars will probably have some effect on gasoline, but with some strange trips along the way.

Of course, increasing the price of gasoline and diesel would both stimulate EVs and reduce the other externalities associated with driving. There has been a lot of dunking on environmental economists in the press and on Twitter over the last several months. The gist of this is that Democrats “finally got major climate legislation passed because they got smart and ignored the economists.” But passing legislation and actually reducing externalities are not the same thing.  The results of subsidizing driving, even if it’s in an electric car, may drive home this distinction. 

Keep up with Energy Institute blog posts, research, and events on Twitter @energyathaas.

Suggested citation: Bushnell, James, “Should We Pay People to Drive Their Electric Cars,” Energy Institute Blog, UC Berkeley, October 10, 2022,

26 thoughts on “Should We Pay People to Drive Their Electric Cars? Leave a comment

  1. The first thing (after the click-bait title) was “alternative’’ fuels like hydrogen. I think this was discussed previously. The least expensive hydrogen is sourced from oil and we’re trying to ween ourselves off oil. Kind of robbing Peter to pay Paul.

    So the EPA is considering subsidizing electricity as a fuel for transportation. I suppose it is possible, but, like was written, that electric energy could be going to an air conditioner. There would be way too many way s that a subsidy like this would be diverted from its intended target.

    “Of course increasing the price of gasoline and diesel would both stimulate EVs” One only has to look into the cost of an EV today and compare prices to last year’s. This is a solid argument to add even more tax to gasoline and diesel. That tax could be used to subsidize EVs, further stimulating EVs.

    Now the challenge comes. How do we pay for the roads? The State of California did a couple of pilot programs investigating a mile tax. The County of San Diego looked into the mile tax. Both found it nearly infeasible. Perhaps a tax on tires?

  2. Giving additional State Tax Credits for installing excess solar panels on the roof would be better than paying people to drive their EV. Utilities Limit the amount of solar you can install on a roof to 115% over the previous year’s bills. With the replacing of natural gas for heating, hot water and cooking plus 2 Electric Vehicles in the garage, the limit should be raised to 300% of the previous year’s usage. if all those new electric powered cars, trucks and devices are going to be powered, why not give the incentive to build a bigger solar system now rather than wait until the devices are finally purchased?

    When I installed my Tesla Solar Glass Roof, the first layout I was given was for 13,200 watts giving me 14,000 kilo watt hours a year, but because my previous bills for the year totaled 7,200 kilo watt hours, they reduced the number of electrically active tiles to 7,860 watts giving me 8,000 kilo watt hours per year to stay under the utility limit of 115%. In order to replace my Natural Gas heating, I had to install another 8,000 watts of solar and batteries in an “off grid” powered system for a total of 15,860 Watts and this is still not enough to replace my Natural gas water heater and my gasoline powered car with an EV.

    Incentives should be for clean energy installations and developments including solar panels and batteries rather than purchasing EVs for Uber, Lyft and other companies or regular drivers that will still congest the roads and cost taxpayers’ money on wear and tear of those roads. Lift the utility limits from 115% to 300% on new solar installations and the consumers will build the infrastructure without tax dollars simply because “Utility Energy” costs twice as much as” Self-Generated Electricity” from homeowner’s roofs.

  3. “the value of the LCFS credits generated by selling a kWh to charge an EV in California was close to the retail price of power, and up to 3 to 4 times the actual cost of producing that power”

    Why should we be concerned about whether the LCFS credit price is connected to the cost of power? That price is just reflecting the scarcity of the credits. Those advocating for the use of hourly single price auctions to drive electricity markets alone rely on similar scarcity pricing to compensate plant investors.

  4. Two $60,000 Teslas ignited last week in Ct — fires couldn’t be extinguished. In West Florida EVs abandoned during the hurricane due to no electrical power burst into flames when they came into contact with salt water. The ‘affordable’ Ford EV F150 is now selling for $92000 on dealer lots.

  5. It is somewhat concerning that this and many other Energy Institute articles fail to present a balanced more neutral and complete analysis of the costs and benefits not only of EV’s but ethanol fuel additives. The direct manufacturing and operating cost of an EV may compare favorably with a gasoline powered vehicle but that limited analysis fails to account for the significant transition costs to upgrade the grid; build public and private charging capability; hire, train and outfit EV maintenance technicians and EMT providers; recycle used batteries; and the need to resolve both the policy and technology costs necessary to charge EV road taxes. Likewise, bio fuels, especially ethanol additives reduce vehicle mileage, performance, and equipment life and account for numerous adverse impacts on water, air quality and other environmental, and food costs. Examining individual policy proposals to tax or subsidize only one part of this economic chain without considering the full cost picture seems misplaced.

    • “the significant transition costs to upgrade the grid; build public and private charging capability; hire, train and outfit EV maintenance technicians and EMT providers; recycle used batteries; and the need to resolve both the policy and technology costs necessary to charge EV road taxes. ”

      These are the types of objections raised by those trying to protect land lines against cell phones. And we know how that came out. The costs to upgrade the grid will be roughly the current average cost of electricity (and in California, less than the average costs so rates overall should go down). The cost of the charging infrastructure is generally included in these analyses. Even so, these costs will be minimal when spread over a large number of vehicles. Workforce retraining will be significant, but protecting workers against technological change has never worked; it’s better to assist them to rapidly transition. The consequences of used batteries will be nothing compared to the current impacts of fossil fuel production. Figuring out how charge road taxes separately from a fuel tax is a truly trivial task in the larger scheme. None of these are concerns that should delay this transformation.

          • The point is that most of your questions are not of large scale consequence. We know that the cost of grid expansion won’t be out of scale with current costs (or the utilities are doing their ratemaking incorrectly) and those costs will be offset by the savings in reduced gas and diesel use. The same is true for the charging infrastructure costs. (We have a study that incorporates that issue coming out soon.) Labor force retraining is important, but it is not a reason to stop the transformation. You need to be specific as to your concern with regards to that issue. Battery recycling will have to be solved for the technology to flourish–it would be a self limiting factor. But again, the environmental impacts from fossil fuel production (ignoring use) are huge and we need to reduce that. Sorry, but how to collect revenues to fund a function is not a serious problem or roadblock. Yes, we have to figure it out, but it will be resolved to maintain the roads. What’s your suggestion as to how to do that if we don’t pursue EVs?

            I don’t care about ethanol. That’s a dead end technology that doesn’t come close to solving the climate change problem.

    • You’ll wait a long time for “a balanced more neutral and complete analysis of the costs and benefits not only of EV’s but ethanol fuel additives” from the Energy Institute. You won’t find a discussion of the billions of dollars of tax-payer subsidies that have been given in the past to the wealthy who have bought Model S and X Tesla’s, and can afford $55k sedans and $80k SUV’s and trucks, under the new price caps. You won’t find a life cycle analysis of the GHG emissions from the extraction of the lithium, nickel, cobalt and copper needed for EV batteries, let alone the costs of tremendous environmental damage, largely out of our sight in developing countries, resulting from those extractive industries. You won’t find an analysis of whether EV prices may be about as low as they will ever be as the costs of the input materials continue to rise, nor a discussion of child labor producing cobalt in the Democratic Republic of the Congo, nor a discussion of China and slave labor producing solar panels and China controlling the supply chain of rare earth metals and the processed metals for EV batteries. You won’t find an analysis of how economically distorted the ethanol/gasoline system has become, nor the morality of using food as a fuel. With rare exceptions, and there have been some, you will mostly find articles here that largely view these issues through an ideological lens that appear to prevent these kinds of “balancing” discussions from taking place.

      • Thanks, it is encouraging to know that there is someone else that can actually see the forest from the trees.

      • And what about the other side of the balance? The environmental ruin and the exploitation of workers in oil producing regions such as the Niger Delta. The rise and support of petrol authoritarians that oppress their populations. The huge amounts of air and water pollution from both the refining and use of fossil fuels. The ruin of vast landscapes to mine coal. The lifecycle emissions from these activities dwarf those for EVs as shown in studies such as the GREET model. Yes, we need to mitigate the effects and exploitations that come with the new technology, but the scale is much less than what we have presently.

        • All those issues are real, but they are covered endlessly in the MSM and by policy makers whereas the issues we are raising about EVs are rarely covered. There is a tremendous amount of green-washing at every level when it comes to EVs, and minimizing the issues and providing cavalier assurances they will all be readily solved is just one example of this. I am strongly opposed to coal; was a very early adopter of eighteen solar panels on my roof; and I enthusiastically welcome better air quality in urban centers as a result of EVs. But you are wrong about the “scale” issue. Just watch the immense environmental destruction and GHG emissions if you try to convert all one billion vehicles on the planet into EVs.

          • First, I haven’t seen a blog post here (which I’ve followed since its inception) discussing any of the environmental consequences of the production of petroleum and natural gas beyond air quality impacts. I think they’ve discussed damages from coal use and measurements of methane emissions. No discussion of the issues that I listed nor of the consequences within California. So I don’t see how this is so unbalanced. Both aspects have been ignored.

            Second, the analyses done to date do not show that the environmental destruction of an EV fleet will be at the same scale as what currently happens with fossil fuel use. Again, you’re right that these issues need to be addressed, but they definitively will not be worse than what we already have.

          • I accept that both aspects have been ignored. While there is focus on local externalities by Energy Institute researchers perhaps they feel externalities outside California or the U.S. are beyond their purview. I do appreciate, Richard, that you’ve taken my comments seriously and responded in a measured fashion, especially given that debates about energy issues can be very contentious. I also want to be on record as noting that the Energy Institute faculty are very bright, well meaning and produce important studies. If you are the Richard McCann from M.Cubed I will have to start reading your work. I’m sure I can learn things from it. Cheers, Arthur

  6. We already DO “pay people” to drive electric cars.

    We do that by subsidizing the purchase of the cars, subsidizing the roadways that the cars use, subsidizing the charging infrastructure, subsidizing the externalities caused by driving (congestion, accidents, noise, tire particle pollution).

    And, in most of the country, we are subsidizing driving of electric cars with retail electricity rates far below the long-run marginal cost of electricity service.

    California and New England are an exception to this, with electricity prices above those levels. But for the rest of us, once one includes the cost of new generation, new transmission, augmenting distribution facilities, and the externalities of electricity production, retail rates are below long-run societal marginal costs. Total Service Long Run Incremental Cost is a different measure than the short-run metric often used by Haas authors, and more accurately measures what “we” pay in higher costs over time in response to higher electricity consumption.

    It’s one thing to subsidize the PURCHASE of electric vehicles, trying to get people over the higher initial-cost threshold. I can defend that, because there are societal benefits to displacing ICE vehicles. But once purchased, EVs are already cheaper to drive the ICE vehicles and subsidizing DRIVING will just compound other adverse impacts of driving.

    I suggest the work of Todd Litman, Victoria Transport Policy Institute, on the “total cost of driving” as a reference on this.

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