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Are Incentives for Electric Vehicles Actually Good for the Environment?
One of the most sought-after substances in the world could limit the true impact of new climate change programs
After five decades of political pitfalls and infighting, Congress took significant action over the weekend related to climate change. Known as the Inflation Reduction Act, the spending bill attempts to tackle climate change, the high cost of prescription drugs, and lower the deficit. There are a number of programs in the bill, including the potential for low-income households to see lower energy bills and corporations being hit with a 15% minimum tax rate. Unfortunately for economists, the new bill doesn’t implement any carbon taxes but instead relies on a host of subsidies to incentivize the adoption of cleaner energy sources.
One of the new programs is an increased investment in rebates for consumers who purchase electric vehicles or improve the energy efficiency of their homes. If a homeowner installs solar panels on their home within the next ten years, they would be eligible for a 30% credit. Homeowners can also claim additional rebates for installing electric cooktops ($840) and improving their home’s electrical panels and wiring (up to $9,100). The biggest credits are reserved for people who purchase a new electric vehicle ($7,500), so long as they earn under $150,000 per year. Even purchasing a used electric vehicle would result in a $4,000 rebate.
Tens of millions of households will be eligible for the credits, but electric vehicle manufacturers may not be ready. The concern isn’t necessarily around the ability of drivers to charge their cars as the US economy has improved tremendously over the past ten years to handle a baseline need for electric charging stations. Unlike the push for ethanol-based cars a few decades ago, elective vehicle drivers can easily “fuel up” their cars. The adoption of ethanol-based cars and electric vehicles are influenced by a form of network externalities classified as self-reinforcing networks.
One of the reasons ethanol adoption was slow to take off was because of the difficulty for drivers to obtain fuel. Gas stations were slow to install ethanol pumps because there weren’t many drivers of ethanol cars. People looking to purchase a new car were hesitant to purchase an ethanol-fueled vehicle because their local gas stations didn’t sell ethanol fuel. The cycle continued and E85 adoption fluttered. The same cycle exists for electric vehicles, but the industry was able to overcome the initial hurdle. Consumers are likely more comfortable with the idea of purchasing electric vehicles because they know that electric charging stations are much more common than before.
Electric vehicle adoption will likely be slowed by the production process, namely the battery needed to power the cars. First, the battery industry will need to invest $200 billion in gigafactories by 2030 to meet the growing global demand for electric vehicles and energy storage. Second, the growing demand for batteries means an increased demand for the raw materials used to produce the batteries. One of the key elements used to produce the batteries for electric vehicles, lithium, is mined in only a handful of locations and the mining process itself is notoriously bad for the environment. New mining technology could allow other countries to fill the increased demand, but most lithium is sourced from well-established mines in Chile, Australia, and China.
In the US, one company is trying to overcome legal hurdles surrounding a proposed lithium extraction site in Nevada because of its potential impact on endangered wildflowers. A quarter of the world’s lithium reserves are in Chile, but extraction has resulted in soil degradation and ecosystem disruption. Lithium is found in South American salt flats, which are located in arid territories, which means water is key for the community’s survival. Lithium extraction, however, requires a lot of water. It takes approximately 500,000 gallons of water to produce a metric ton of lithium. For Chili’s Salar de Atacama, mining activities consumed 65% of the region’s water.
Lithium extraction has also been linked to a variety of other environmental issues as well. Unwanted lithium batteries (often found in cell phones and laptops) routinely find their way to local landfills, where toxic metals can leak into the environment. While it may seem that recycling is the solution, lithium cathodes degrade over time and thus cannot be placed into new batteries.
As “top-level” lithium reserves are depleted, it will become increasingly more expensive to extract lithium deposits from further into the earth. While it may be possible that new extraction methods lower the cost, they may also be subject to some of the same environmental harms that were discovered when fracking decreased the cost of extracting oil and natural gas.
The question for policymakers is whether the costs associated with increased lithium extraction are less than the environmental benefits associated with switching to electric vehicles. The documented impacts of lithium thus far have been related to our previous and near-term projects on lithium needs, however, new government policy will increase the demand for additional lithium reserves.
The Inflation Reduction Act could reduce the deficit by $305 billion [Committee for a Responsible Federal Budget]
By the end of 2021, the federal government had $28.43 trillion in federal debt [US Treasury]
Approximately 106.2 million US households (81% of all households) earned less than $150,000 in 2020 [US Census Bureau]
As of 2021, there were 50,054 charging stations for electric vehicles in the US [US Department of Energy]
The U.S. produces less than 2% of the world’s supply of lithium [PBS]