With the “Shocking” rise of EV popularity, is now the right time to make the purchase?
Executive Summary
Electric vehicles (EVs) have been gaining popularity lately as the technology develops. Only a few years ago, seeing a Tesla on the streets was a rare occasion. These days, I see them nearly every time I drive. To further boost the adoption rate, recent legislation has expanded tax credit provisions to promote affordability and domestic production. With this growth in awareness and affordability, many are wondering if it’s time to make the switch.
In the following article, I propose a values-based framework to use when presented with such a decision. Beyond just the affordability of a purchase, consider the “why” behind your motivation. Are you considering an EV to make an environmental impact? If so, there are some factors to think through before you can proclaim yourself “emission-free”.
Values-Based Decision Making
Financial decisions are often put through the lens of maximizing one’s wealth. In contrast, we put a lot of emphasis on values and life goals. Values are an anchor to every conversation. In this way, we ensure our clients are living their lives in a way that brings fulfilment as opposed to simply living to accumulate wealth.
Using this framework, consider the topic at hand. There are many factors to consider: what type of EV you want, what make/model to choose, and eligibility for a tax credit. But before you venture down the rabbit hole of research, start by asking yourself: “why do I want an EV?”. Think about the values that sparked your interest. What exactly is fueling your motivations?
Maybe you are a car person and just think they are neat. Maybe you are a fan of Elon Musk (or like many of our clients, you are drawn to EVs despite his eccentricities). Assuming it is within your budget and no harm is being done, then why not? But I would wager that the most common reason for going electric is to make a positive environmental impact. If your motivation is to benefit the environment, we need to consider the facts before assuming your purchase will have the desired effect.
Consider the following questions and how they apply to your specific situation:
• What vehicle would I be replacing, if any?
• What type of EV will I purchase?
• How will I power an EV?
Replacing your Gas-Powered Vehicle
When considering the benefits of an EV, we typically think of the lack of emissions when operating the vehicle. However, there are also significant environmental costs to manufacturing and shipping a vehicle before you even drive it off the lot. In many cases, it can be more environmentally friendly to keep driving your gasoline-powered car for a bit longer. The carbon footprint of manufacturing a car is significant, estimated at 17 tonnes of CO2 for a mid-sized vehicle (What's the carbon footprint of ... a new car? | Environment | The Guardian). Whereas government data shows us that driving a 2018 Toyota Camry 15,000 miles in a year creates 4 tonnes of CO2. (2018 Toyota Camry (fueleconomy.gov)). Therefore, this rough estimation tells us that buying a brand-new car has a similar carbon footprint as over 4 years of average driving.
What type of vehicle are you currently driving? Chances are, if you value the environment, you are not driving a large, gas-guzzling mega-SUV. But if you are, the upgrade to higher fuel efficiency is hard to beat. Additionally, how old is your vehicle? If it’s made before 2010, it likely has poor efficiency and worse filtering of particles, so it’s probably time to replace anyways. But if you own a newer and reasonably efficient vehicle, consider keeping it for a few more years.
Extra Credit: If you want to replace your gas-powered car without worrying about manufacturing emissions, there is a new tax credit for used EVs (details to follow below). This is a fantastic way have your cake and eat it, too! You get to drive close to emission-free, and you aren’t directly supporting the demand of new car manufacturing either.
Types of Electric Vehicles
It is important to remember that not all electric vehicles are created equally. There are four types of EV engines being produced today. The first to hit the market was the Conventional Hybrid (e.g., Toyota Prius). These engines use a combination of gas combustion and an electric motor. The electric motor is powered when the vehicle brakes, so it is limited in the amount of electric power it provides. Notably, this form of EV is not eligible for the tax credit discussed below, as it relies too heavily on gasoline power.
Next, there are plug-in hybrids, which combine a combustion engine with a battery-powered electric motor. Unlike the conventional hybrid, these can be eligible for the tax credit assuming they are powered significantly by battery, among other stipulations. The battery power on these vehicles can be sufficient for daily commutes and in-town driving, but the gasoline combustion will be required for longer trips.
Then, there are fully electric vehicles that have no combustion engine, only the battery-powered electric motor. Most commonly, these are lithium batteries that are charged externally. A less common form is powered by hydrogen fuel cells. These engines do not plug into an electric source to charge, but rather use hydrogen gas and a chemical reaction to create electricity within fuel cells. Both options are eligible for the tax credit discussed below.
Depending on the type of engine your chosen vehicle uses, you might still rely on a certain level of gasoline combustion. Therefore, you will still be creating CO2 emissions, though in smaller quantities. So, if your goal is to be as carbon-free as possible, this information will help narrow down your search.
Electricity Sources for Battery-Powered Vehicles
As mentioned earlier, the goal of an EV is to run virtually emission-free. This sounds great, but you must also consider the source of the electricity you used to charge your battery. For the United States, at least, the majority of our electricity is still generated via the burning of fossil fuels (60% as of 2021, Electricity in the U.S. - U.S. Energy Information Administration (EIA)). This is an unfortunate statistic but isn’t quite the full picture. The engine of a fully electric vehicle is significantly more efficient at using its energy compared to a gasoline vehicle. A combustion engine will lose 64-75% of energy when burning fuel, compared to only 15-20% for running an EV (Where the Energy Goes: Electric Cars (fueleconomy.gov)).
Additionally, there are other ways to limit your carbon footprint. One option is to install solar panels on your home. This way, you are creating your own renewable energy. There are tax credits as well as state and local initiatives to help cover the cost (a subject for another day). If a solar installation is not in your budget, there are many local programs for taking part in solar, wind, and other renewable energy sources. Research your local energy suppliers to learn more about how you can move your consumption away from non-renewable fuel sources. There are options like Arcadia, where you can support a local solar farm and received credits against your electric bill.
Tax Credit Changes
Now let’s assume that you’ve gone through the decision-making process above and are ready to pull the plug on your gas-guzzler. Are you eligible for a tax credit to help with the purchase? Here is a summary of changes to the federal tax credit impacted by the Inflation Reduction Act (IRA) of 2022. Despite its name, the IRA is one of the most comprehensive bills aimed at climate change in a generation. It includes a re-working of credits available for EVs effective January 1, 2023. The bill extends the EV credit up to $7,500 through 2032. It also brings back the credit for installing a home charger (30% of hardware and installation cost up to $1,000). A brand-new credit was added for used EVs (30% of the cost to a maximum of $4,000).
There are also changes related to eligibility. The good news is that the pesky manufacturer cap is gone, bringing credits for the highly popular models by General Motors, Telsa, and others back into consideration. The IRS has published a list of qualified manufacturers here. However, there are new restrictions on which EVs are eligible. Certain components must be sourced in North America, and final assembly must be done in North America. You can use this VIN Lookup Tool to determine eligibility. Furthermore, the credit is not available for higher-priced vehicles (MSRP: $55,000 for cars and $80,000 for trucks).
Then, there are new income limits to determine who can claim the credit. Single taxpayers must be under $150,000 adjusted gross income, or up to $225,00 for a head of household. Married couples filing joint have up to $300,000.
Why all the restrictions and complexity if the point is to sell more EVs? Well, you might say that each Federal administration has its own values that it uses to make decisions. After all, tax credits are simply a way for the government to promote certain behavior from taxpayers, whether individuals or corporations. It is clear from this bill that the Biden administration doesn’t just want to support clean energy. They want to support bringing manufacturing back home, and they want to specifically support lower income consumers with financial incentive to go green.
Summary
Together, we have looked at a values-based approach to the question ‘Is it time to purchase an electric vehicle?’. The primary motivation we see for this decision is to shift towards greener technology and care for the environment. It may not be a simple decision, but it can be an impactful one. There are ways to use your resources that can work in harmony with your values. Strategic spending can be a vote for the issues that are important to you.