The Trump administration made it clear that it wants to eliminate the federal electric vehicle (EV) tax credit in favor of a different set of policies pertaining to the transport sector. But it hasn’t yet given out specifics about how it’ll all play out.
Of course, if the $7,500 incentive were to disappear, it would have a direct impact on EV sales at a time when the industry is facing somewhat of a backlash. But would the abolition of the EV incentive truly be that bad? Perhaps, more importantly, how will it impact the wallets of consumers? If we can use other parts of the world as a guiding light, the abolition of the tax credit may not be as disastrous to the EV industry as some may believe.
Incentives Are A Driving Force Behind EV Sales
The obvious main takeaway from tax credits is that, yes, they do help the average consumer purchase a vehicle they could otherwise not afford, or give them the final go to make the move on a new EV. According to a recent study by J.D. Power, which surveyed nearly 8,000 EV owners, about half of them were in one way or another influenced by incentives. No less than 64% of owners say that the tax credit was a primary driver for buying an EV.
That’s because cost remains the main motivator behind EV sales. Sure, there’s the notion of lower maintenance and running costs, as well as the fact that these vehicles emit no tailpipe emissions. But at the end of the day, the final price of a vehicle is what seals the deal. On average, folks who purchased or leased a new EV in 2024 saved $5,124 thanks to federal incentives.
As a reminder, for an EV to qualify for the federal tax incentive, it must be assembled in North America, and that at least half of its battery components must be produced or assembled in North America. Some electric models, like the Volvo EX30 or the Kia EV6 GT are assembled outside the U.S. They are therefore excluded from the credit.
Incentives Versus Regulation
In order to better understand the real impact of the removal of the EV tax credit, we must first understand the differences between incentives and regulations, and how they’ll help transform the automotive industry in the coming years. Yes, it’s true that on a short-term basis, removing the credit could have a negative impact on EV sales. But in the long run, it could end up not mattering at all.
That’s because the auto industry isn’t just driven by demand. It’s also driven by regulations, which have helped shaped the automotive landscape since its inception. One of the main factors that dictates why cars look the way they look and why they are powered by specific types of engines is federal regulation. While EV incentives do help drive consumers into showrooms, regulations will force carmakers to sell a certain type of car.
It’s no secret now that the end of the internal combustion engine (ICE) is near. Whether we like it or not, one day, carmakers will no longer be allowed to sell new gasoline-powered vehicles in an attempt to collectively reduce CO2 emissions directly linked with climate change. Some countries, like China, Canada, Norway and the E.U. have already set an end date for ICEs. And regulations will help us get there.
Like a crystal ball into the future, we can look north of the border at what is happening in the Canadian province of Quebec for insight. By the beginning of next year, the Quebec government will gradually start reducing its provincial EV incentives until they are completely removed in 2027. Up until now, Quebec residents have received a full $7,000 in cash for a new electric vehicle, effective at the moment of purchase. Combined with the Canadian federal government’s $5,000 incentive, Quebecers got a full $12,000 off the final sales price. You can imagine, then, how much of a deciding factor incentives were for EV sales in Quebec.
But as the amount of available incentives will soon decrease, we’re already seeing carmakers respond to the problem in Quebec by advertising lower prices and/or interest rates in an attempt to keep customers walking into showrooms. Why? Because Quebec also has a strict regulation surrounding zero-emission vehicles. If carmakers don’t sell a certain percentage of EVs per year, they end up getting heavily fined.
And as the years pass, both the Quebec and Canadian governments will increase the percentage of EVs carmakers are required to sell in an attempt to reach their zero-emission targets. In other words, by regulating the industry and penalizing carmakers for not respecting these regulations, carmakers will need to adapt their business models in order to keep sales up.
But the real question isn’t how the Trump administration’s abolition of EV incentives will affect EV sales, but rather how it plans on regulating the auto industry. This will be the true deciding factor for the future of EVs in the U.S. By the looks of it, there doesn’t seem to be a lot of room for electric vehicles in Trump’s plan. That being said, if regulations at the federal level don’t force carmakers into a cleaner future, then perhaps state regulations like California’s Advanced Clean Cars II will.
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