Congress Throws Cash At Plug-In Hybrids

By · October 04, 2008

The $700 billion bailout bill signed by President Bush yesterday includes tax credits up to $7,500 for US buyers of electric vehicles and plug-in hybrids. Only one such vehicle—the Tesla Roadster—is on sale today, and volume production by other makers will not start for at least another two years. Total funding for the credits is $1 billion, and they will expire in 2014.

The goal is to help offset the high retail prices of vehicles with high-capacity—and initially very expensive—battery packs, to kick-start consumer purchases and get much thriftier vehicles on the road faster. General Motors, for example, has quoted a price of $40,000 for its compact Chevrolet Volt, a plug-in hybrid vehicle.

For qualifying light-duty plug-in electric drive vehicles, the amount of the credit is based on the energy stored in the battery. The battery pack must have at least 4 kilowatt-hours (kWh) to qualify; the base credit for a vehicle with that pack would be $2,500. The credit rises by $417 for each additional kWh, to a maximum size of 16 kWh—which is, not coincidentally, the size of the pack in the Chevrolet Volt, qualifying that car for the full $7,500 when it launches late in 2010.

By comparison, the pack in today’s Toyota Prius—which can only run a mile or so on electricity alone—contains 1 kWh of energy. Though Toyota hasn’t released specifications for the plug-in Prius it expects to sell to US fleets next year, that pack is expected to be less than 4 kWh, and so would not qualify for any credit.

The credits would begin to phase out once more than 250,000 qualifying vehicles are sold in a single calendar year. They would be cut to 50 percent for the two quarters following that event, and then 25 percent for the two quarters after that. For larger commercial vehicles, defined as those weighing more than 10,000 pounds, the formula is the same but the maximums are higher, from $10,000 to $15,000 depending on weight class. To be eligible, vehicles must comply with the Clean Air Act, meaning that private converters would presumably have to certify their vehicles under the Environmental Protection Agency’s emissions testing cycles.

The bill also extends current tax credits for development of cellulosic ethanol and biodiesel (and revises their definition to include production from non-biomass sources—one of which might be municipal garbage, for instance); wind, solar and hydroelectric power; heavy-truck idling reduction equipment; and makes it possible for utilities to recapture the costs of “smart meters” and associated components of the electricity transmission grid more quickly.

It does not, however, address the current tax credits for today’s hybrids—meaning that a cap of 60,000 qualifying vehicles per manufacturer remains. The result is that Toyota buyers are no longer qualify for that credit, while buyers of lower-volume hybrids from Ford, Nissan, and General Motors still do.

Plug-in Pork

What does this have to do with preventing a financial meltdown in the global credit markets? Not much. The plug-in/EV tax credit was one of several changes made to US Treasury Secretary Henry Paulson’s original 3-page bill during a tumultuous week of market turmoil, frantic scrambling by the Administration and Congress, and intense lobbying by—it seemed—just about everybody. The bill that passed—officially known as H.R. 1424, the Emergency Economic Stabilization Act of 2008—now runs more than 450 pages.

To the provisions of the failed bill, it adds help for homeowners who have mortgage trouble, more oversight of the Treasury's purchases of shaky assets, and executive-pay restrictions. It also includes ways that the Treasury can try to recoup any losses if it doesn’t break even on its eventual sales of the assets it will buy.

But beyond that, a number of tax breaks were bundled in as well. One provision exempts roughly 20 million taxpayers from having to pay the alternate minimum tax. The vehicle tax credits make up one subsection of the bill’s Transportation and Domestic Fuel Security Provision.

The tax credit comes on top of another piece of good news for the beleaguered US auto industry. Earlier last week, the president signed a bill making available to automakers that build cars in the US, and their suppliers, $25 billion in low-interest loans to invest in higher-mileage vehicles, equipment, and plants. That bill addressed the Detroit Three’s corporate debt, ratings on which have fallen to junk levels—meaning they must pay 12 percent or more to borrow money. That bill doesn’t give the automakers funds; the Federal Government just guarantees lower-cost loans made to them. Those guaranteed funds, however, must be used to develop and build vehicles whose fuel economy is at least 25 percent better than the vehicles they replace.

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