An Analysis of US Subsidies for Electric Buses and Freight Trucks

... Congress may create entirely new subsidies for commercial electric vehicles and associated charging infrastructure included in both the Clean Energy for America Act and the Build Back Better Act. This issue brief analyzes the carbon dioxide (CO2) reductions and fiscal costs of subsidies for transit buses and certain trucks.

Medium- and heavy-duty vehicles (that is, anything larger than a passenger vehicle) consume roughly 30 percent of the total energy used by on-road or “highway” vehicles and generate about one-quarter of GHG emissions from the transportation sector (equivalent to 7 percent of total US emissions). 

... The fiscal costs and GHG reductions of the electric truck subsidies will depend on how much truck buyers respond to the subsidies and how much those trucks are driven, but because these subsidies are brand new, it is that much harder to anticipate their effects and assess how much the subsidies may help achieve the Biden administration’s climate objectives.

Joshua Linn and Wesley Look study the potential effects of offering tax credits to transit buses, day cabs (freight trucks that do not include a sleeping compartment), and sleeper cabs (freight trucks that include a sleeping compartment). The three vehicle categories account for almost half of carbon dioxide (CO2) emissions from medium and heavy-duty vehicles (MHDVs), with sleeper cabs making the largest contribution of the three types. 

They analyze a subset of the vehicle types that are eligible for subsidies, and are not estimating the total effect of the policies on all MHDVs.

They use a new computational model of MHDVs that accounts for the effects of subsidizing 30 percent of the up-front purchase cost of transit buses, day cabs, and sleeper cabs to estimate the uptake, fiscal costs, and CO2 benefits of the subsidies through 2035, relative to a baseline case that does not include the subsidies. They consider scenarios that differ by the rate at which electric vehicle prices decline over time; in all scenarios, the subsidy phases out after electric vehicles achieve 50 percent market share.

Their key findings are:

1. In the baseline case (no subsidies), electric buses, day cabs, and sleeper cabs are unlikely to achieve significant shares of new purchases by 2035.

2. The effectiveness of the 30 percent subsidy at increasing electric bus and truck sales depends on the assumed rate at which electric vehicle prices decline. Assuming a moderate rate of pre-subsidy price decline, the subsidy causes electric bus, day cab, and sleeper cab sales to begin increasing around 2030 and achieve a 50 percent market share in 2035.

3. Assuming a faster rate of price decline, the subsidy causes electric buses, day cabs, and sleeper cabs to achieve a combined 80 percent market share by 2035. At a faster rate of price decline, the subsidy reduces emissions by about 60 million metric tons of CO2 in 2035, which amounts to about a 60 percent decrease in emissions relative to the baseline (no subsidy) scenario.

Figure 1. Total Sales (number of new EV trucks sold per year

Total (undiscounted) fiscal costs between 2022 and 2031 are $2-24 billion, depending on the degree of price decline, with faster decline causing greater uptake and higher fiscal cost. Fiscal costs per ton of CO2 reduction are broadly comparable to recent estimates for subsidizing plug-in electric light-duty vehicles.

Note that the Biden administration’s target is for total US GHG emissions in 2030 to equal half of total emissions from 2005. The emissions reduction in 2030 for transit buses, day cabs, and sleeper cabs in the high-technology scenario amounts to 1.4 percent of the total emissions reduction needed to achieve that target. 
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An individual buyer considering either a bus or cab trades off up-front purchase costs against fuel and maintenance costs. For example, they assume that an all-electric bus has a purchase price of about $185,000 in 2030 (not including subsidies), which is almost 50 percent higher than the price of a diesel bus.

Figure 3. Percent of Electric Buses and Trucks on the Road

In contrast to the higher purchase price of an electric vehicle, fuel costs and maintenance costs of electric vehicles are considerably lower than for diesel fuel vehicles. For example, electric day cabs have roughly 23 percent lower per-mile fuel costs and 40 percent lower annual maintenance costs than diesel fuel day cabs. Because of the lower per-mile fuel costs, a day-cab buyer expecting to drive a high number of miles is more likely to buy an electric day cab than a buyer expecting to drive fewer miles. Moreover, because fuel costs and maintenance costs accrue over the vehicle’s lifetime, and the electric vehicles save money each year, a buyer with a low discount rate is more likely to buy an electric vehicle than a buyer with a high discount rate.

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For each year and market, they estimate the distribution of expected miles and discount rates across the buyers. We simulate the fuel type choice of each buyer accounting for vehicle prices, vehicle subsidies (if any), fuel prices, maintenance costs, expected miles, vehicle lifetimes, and discount rates. They keep track of the diesel fuel and electricity consumption for the buses and trucks between their purchase and retirement. Total CO2 emissions each year include tailpipe emissions from burning diesel fuel as well as electric power sector emissions from charging the batteries. The rate of CO2 emissions per kilowatt hour of electricity decline over time as the power sector continues its transition toward lower-emitting sources. They assume a linearly declining national average emissions rate for electricity, which begins at 0.417 kilogram of carbon dioxide per kilowatt hour (kg CO2/kWh) in 2020 to 0 kg/kWh in 2050, 

One of the policy scenarios assumes modest declines in battery costs (low-technology case) and the other assumes more aggressive declines in costs (high-technology case). Specifically, in the low-technology case, bus and truck prices decline about 40 percent between 2020 and 2030 due to improving battery costs. In the high-technology case, battery costs decline even further by 2030, causing bus and truck prices to drop almost 70 percent between 2020 and 2030. 
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Annual federal expenditures peak at about $7 billion in 2030 under the high-technology scenario and almost $5 billion in 2034 under the low-technology scenario. The estimated cumulative costs between 2022 and 2031 are $24 billion for the high-technology scenario and $2 billion for the low-technology scenario....

Figure 2. Annual Federal Tax Expenditure by Scenario (2019$)

For the low-technology scenario, the subsidies have small effects on emissions through 2035. For example, in 2030, the subsidies reduce emissions by only 0.4 percent of baseline emissions estimates for these vehicle classes (and by 6 percent in 2035). In contrast, in the high-technology scenario, the subsidies cut emissions by 13 percent (21 million metric tons CO2) in 2030 and 41 percent (61 million metric tons CO2) in 2035.

Figure 4. CO2 Emissions

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Day cabs account for 62 percent of the total 2030 emissions reductions; sleeper cabs account for 34 percent, and buses for the remaining 4 percent.
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The overall average fiscal cost-effectiveness is $641 per metric ton of carbon dioxide, which is better than recent estimates for light-duty vehicles.  Costs per ton reduced are lower for the high-technology scenario. The policy is more cost-effective in the high-technology scenario because the price differential between electric and diesel vehicles is smaller in this scenario....

Table 1. Fiscal Cost-Effectiveness (USD per ton CO2 reduced)

Overall, they find that electric bus and truck subsidies can substantially affect new sales, on-road stocks and associated CO2 emissions, and the timing of these effects depends on the pace of battery price reductions.

By Joshua Linn and Wesley Look

Resources For the Future (RFF) www.RFF.org Issue Brief

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https://www.rff.org/publications/issue-briefs/an-analysis-of-us-subsidies-for-electric-buses-and-freight-trucks/

January 11, 2022