Tax Analysts Blog

Policy in Reverse: Clean Vehicle Credits Increase Emissions

Posted on Feb 28, 2011

All of Washington is looking to reduce the deficit and reform our tax system. Tax credits for alternative energy increase the deficit and make the tax code more complicated and unfair. We've made those points before. But did you know green tax credits can actually defeat the policy goals of environmentalists who are their strongest proponents? No, this is not a right-wing rant on the global warming hoax. It is simply a reality check.

Under current law, generous tax incentives are available for gasoline-electric hybrid vehicles (section 30B) and plug-in hybrid vehicles (section 30D). Also under current law, Corporate Average Fuel Efficiency (CAFE) standards require automobile manufacturers to achieve fleetwide targets regarding their fuel efficiency. The Obama administration would like to strengthen CAFE standards and tax credits for hybrids.

All other things being equal, high-mileage hybrids reduce corporate fleet averages. But manufacturers want to sell as many low-mileage, gas-guzzling vehicles as possible because they are generally more profitable. So any reductions in fleet averages due to increased sales of hybrids are likely to be offset by more sales of larger vehicles.That reduction in the fuel efficiency of nonhybrid vehicles offsets the fuel-saving effects of hybrids and leaves overall fleet fuel consumption unchanged.

Unfortunately, our sad story does not end there. Remember with the hybrid credit we have just injected a lot of new funds into the automobile market. Overall, we have made driving less expensive, so that Americans will buy more cars and drive more than they would have done in the absence of a subsidy.

In summary, we have (1) the combination of CAFE standards and hybrid credits leaving fleet efficiency unchanged and (2) hybrid subsidies increasing the overall amount of driving and auto sales. Their combined effect is increased fuel consumption.

President Obama and the environmental lobby may want to reconsider the kitchen-sink approach to promoting fuel efficiency. Sometimes less is more.

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