Will Trump Policies Kill The Electric Car?

The president-elect has vacillated on the environment as of late. On the one hand, during his campaign he promised to “cancel” the Paris climate agreement and called climate change a “hoax.”

Then, in an interview with the New York Times last week, he appeared to soften his approach and said he would keep an “open mind” on the Paris agreement. His chief of staff, Reince Priebus, then went on Fox News Sunday to clarify, saying: “He’ll have an open mind about it but he has his default position, which most of it is a bunch of bunk.” So, it doesn’t take huge powers of deduction to conclude that things don’t look so good for the environment after all.

So what's really going on and what will happen to the EV industry?

As we reported last week, Trump’s energy policy could likely hobble American clean-energy initiatives. On top of that, since his “open mind” seems tenuous and will be coupled with a Republican-controlled Congress, there appears to be little reason for optimism that electric vehicles will garner favorable policy positions, let alone an even playing field.

We can easily identify the risks EVs face. One of them is independent of Trump, and that’s a protracted period of cheap gasoline which has already lured some motorists back into less efficient SUVs. And since no fuel price spikes appear to be on the horizon, cheap petroleum could have a significant drag on demand for some time.

But a significant problem Trump could cause would be the removal of the $7,500 federal tax credit consumers enjoy when they buy or lease an electric vehicle. If Trump were to come down heavily in favor of the fossil fuel industry, removing the EV tax credit seems like a plausible move to undercut demand. But the tax credit can't be eliminated by executive order. Instead, Congress would have to act, which would take time, especially as the EV tax credit is part of the larger federal tax code.

Another area where Trump could have influence is on the 2025 U.S. fuel economy standards. The Alliance Of Automobile Manufacturers, an auto-industry lobbying group, reached out to the Trump team just two days after the election and urged them to revise the standards, Fortune reported.

As it stands, automakers must meet a fleet-average of 54.5 miles per gallon by 2025. But this is subject to a mid-term review in April 2018. At that time, the EPA and the National Highway Traffic Safety Administration must decide whether to maintain these fuel-efficiency targets or change them if they are not deemed viable.

The Alliance of Automobile Manufacturers represents the major car companies, and cautions cheap gas and weak demand for EVs are undercutting the viability of reaching the 2025 fleet-average mpg targets. Since selling alternative-fuel vehicles, like EVs, would help achieve those targets, the industry appears to be looking for some wiggle room.

In combination, these factors align to offer formidable headwinds to the growth of electric vehicles, which in any case remains a tiny slice of the overall global automobile market, at just 0.10 percent.

On the other hand, several factors bode well for the future of EVs.

Global environmental policy is on the side of electric vehicles.  Firstly, the American government doesn’t legislate for the world, and there are favorable policies coming forward from foreign governments all over. Even if the Trump administration reneges on the Paris climate agreement, other countries will sustain the fight against global warming, with or without America’s leadership.

For example, China will act out of self interest. The country loses 1.6 million lives a year due to air pollution, prompting the Chinese to take air pollution as seriously as climate change (which is very much related). The country's suffocating air is largely due to coal-fired power stations but as the Wall Street Journal reports, the Chinese government recently introduced new regulations to penalize automakers that produce an insufficient number of electric, plug-in hybrid and fuel cell cars. By 2018, such cars must account for 8 percent of a manufacturer's production, rising to 12 percent by 2020. This share is significant in a market with annual sales of 20 million cars and growing.

China’s action, the WSJ reported, has already practically forced Toyota to get behind producing fully electric cars -- something the company was reluctant to do up to now.

The same goes for Volkswagen. The German automaker's diesel emissions scandal proved to be somewhat of a catalyst for bolstering its focus on electric vehicle development. VW’s new focus on EVs marks “a new strategy in a rapidly changing car market,” Christian Stadler of the U.K.’s Warwick Business School told the BBC, specifically citing China’s new rules. It is worth noting as well that China is already the world’s largest EV market.

In Europe, too, the tide is moving toward electrics. Incentives in Norway, such as lower taxes, free use of toll lanes and access to bus lanes, are successfully driving sales. Now, almost a quarter of new cars sold in Norway are electric.

And in a bold move, Germany’s Bundesrat, a legislative body representing the country’s 16 states, recently passed a resolution to completely ban EU sales of vehicles with internal combustion engines starting in 2030, Forbes reported. It's a non-binding target, because the German Bundesrat cannot legislate for the whole EU, but German regulations have traditionally shaped EU regulations, Forbes contributor Bertel Schmitt pointed out.

Which, by the way, is similar to how California regulations tend to influence auto regulations for the rest of United States. The Detroit Free Press reminds us that the California Air Resources Board will require zero-emissions vehicles to account for 22 percent of automakers’ sales by 2025. This requirement is independent of federal changes that may take place under Trump, and California’s influence as the country’s largest car market has nine other states aligning with it on common targets.

It’s hard to imagine, then, that in an industry as globalized as the car business, and with these legislative forces in play, manufacturers can possibly back away from electric vehicle production -- no matter what a Trump administration does.

Important performance milestones

But another thing EVs have going for them, beyond favorable global legislation, is the fact that we have reached some performance milestones that further assure their long-term future.

Such milestones address key consumer concerns with electric cars. This month, Chevrolet began shipping its new pure electric vehicle, the Bolt. The company claims the car can travel 238 miles on a single charge and will cost $30,000 after the federal tax credit. The Bolt tackles the common range-anxiety problem and begins to address concerns over affordability.

Of course, there are more affordable conventionally powered cars available today, and if the tax credit goes away, affordability would be adversely impacted. But even so the Bolt, and Tesla’s forthcoming Model 3, both promise a driving range that overcomes range anxiety -- and they do so at a sub-luxury-car prices. Furthermore, costs will only drop from this point.

This is because battery costs continue to fall. They're already down 80 percent since 2008, the Economist reported, and Tesla estimates its new Gigafactory in Nevada will bring the cost of batteries down to lower than $100 per kilowatt-hour by 2020. At that price, batteries start to become cost-competitive with oil without subsidies.

The latter point is important, at least in the U.S. market: Even if the incoming administration and Congress eradicate the federal tax credit, ultimately this benefit self-expires anyway. The $7,500 tax credit ceases to apply once a manufacturer exceeds sales of 200,000 units, after which the amount halves progressively with additional units sold, eventually falling to zero.

So, in the long run, EVs will have to be price-competitive without tax incentives in the U.S. market. Bloomberg reports Tesla will probably cross this line by the first half of 2018. The electric vehicle company has proven to build cars people aspire to owning, with high levels of performance. And this point might prove to be the real clincher: EV performance is ultimately headed toward exceeding that of the internal combustion engine at price parity. True, EVs are not over the hump with regard to price and range, but the trend is always moving in the right direction.

It's a long game

All things considered, momentum seems to be with electric vehicles when viewed on a global basis. In the immediate term, the market in the U.S. might slow or contract under the new administration. But EV market share will grow in places where governments impose tougher regulations than in America. And car makers, no matter where they are based, will want to have a piece of that growing market, or at least continue to develop EVs to hedge their bets.

This has always been a long game. It’s not hard to imagine future oil price increases will quicken the pace of EV uptake -- oil is, after all, an historically volatile commodity. And coupled with ongoing incremental improvements in battery technology, and perhaps even new breakthrough battery chemistries, manufactures are highly unlikely to abandon their investment in electric cars.

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