How affordable are electric vehicles?

How affordable are electric vehicles?
By Sam Pournazeri, Stacy Noblet, and Fang Yan
Aug 12, 2022
7 MIN. READ

Despite supply chain issues and limited inventories, the electric vehicle (EV) market in the U.S. is growing rapidly. Yet these vehicles are still considered inaccessible to many people due to their high upfront cost.

At a national level, sales of new light-duty plug-in electric vehicles, including battery electric and plug-in hybrids (hereinafter referred to as EVs), nearly doubled from more than 300,000 in 2020 to over 600,000 in 2021. In the first quarter of 2022, more than 81,000 EVs were sold in California alone, increasing the market share of EVs to an all-time high of 16.3%.

Figure 1. California EV sales in the first quarter of 2022

Figure 1. California EV sales in the first quarter of 2022
Aside from fuel cost, maintenance costs of EVs are also 30%-40% lower than gasoline vehicles per mile basis, making these vehicles much cheaper to drive and as long as fuel prices remain high, EVs can come out better in total cost of ownership.

This is no surprise when considering that today driving an EV is almost four times cheaper than driving an average gasoline vehicle (19 cents per mile for a gasoline vehicle versus five cents per mile for driving an EV). According to ICF’s assessment, with national gasoline price reaching almost $5 per gallon in June 2022—and national average residential electricity price fluctuating around 15 cents per kilowatt-hour—driving an EV is approximately four times less expensive than driving an average gasoline vehicle.

Many automakers have detailed plans to electrify large portions of their fleets over the next decade, with some announcing goals for fully electrified lineups within the next five years. Of the top four auto manufacturers with the greatest U.S. sales, General Motors aims to have 25 EV models available in the U.S. by 2025, motivated by its all-electric goal by 2035. American Honda is aiming for all electric sales by 2040. Ford has announced it will produce more than two million EVs annually by 2026 and projects that EVs will account for half of its global sales volume by 2030. Toyota announced its latest electrification goals in December 2021, promising to build 3.5 million battery-only EVs per year worldwide by 2030.

In the meantime, California is on track to adopt its Advanced Clean Cars 2.0 (ACC 2.0) regulation aiming for more than 70% of new vehicle sales in California to be zero emission by 2030, with a goal of reaching 100% by 2035. With the adoption of ACC 2.0, several other states (also known as Section 177 states) will follow California’s footsteps and will likely adopt similar requirements. This is by far one of the most consequential state actions taken to date to reduce climate pollution.

The question that remains: How affordable are electric vehicles?

This consideration is of utmost importance when it comes to the intersection of EVs and equity. Historically, EV buyers were mostly higher income homeowners. According to research conducted by the National Center for Sustainable Transportation of University of California, Davis in 2018, while households earning less than $100,000 per year represent 72% of gasoline vehicle purchases, they are only responsible for 44% of EV purchases.

At the core of this disparity is the high upfront cost of EVs as compared to their gasoline counterparts. According to EV sales data from the California Energy Commission (CEC) combined with ICF’s proprietary EV library, in the first quarter of 2022, the sales weighted average manufacturer suggested retail price (MSRP) for EVs sold in California was approximately $56,000, or $13,000 more than an average gasoline vehicle sold in the U.S. According to ICF’s assessment of MSRP data for vehicles sold in 2021, an average gasoline vehicle in 2021 had an MSRP of $43,000. These figures exclude federal, state, or other government incentives that reduce the cost of EVs.

Among the reasons for this remaining cost disparity are the market dominance of Tesla, a luxury vehicle manufacturer, in California and U.S., and the lack of availability of affordable EV options. For example, as shown in Figure 1, currently Tesla makes up 65% of California’s EV sales market, the majority of which are the Model 3 with an average MSRP of $45,000 and Model Y with an average MSRP of $64,000. It is worth noting that Tesla vehicles are not currently eligible for the federal income tax credit and are no longer eligible for the California Clean Vehicle Rebate Project (CVRP) regardless of income level. One conclusion is that incentives are not major drivers for Tesla drivers to purchase EVs. While limited less expensive models exist—such as Toyota Prius Prime, Nissan Leaf, and Toyota RAV 4 Prime with MSRP values of $40,000 or less—these vehicles comprise about 10% of the market.

Questions for federal, state, and local government officials to think about include what changes are needed to vehicle incentive structures to increase their effectiveness in boosting the EV market? Particularly, how could incentives be used to drive more people from low-income brackets to purchase EVs?

To better illustrate this point, we took the sales data both at the California and U.S. level and combined them with the price data from Edmunds.com as well as ICF’s EV library to show the sales distribution as a function of price. Through this analysis, we were able to show a comparison of vehicle sales portion as a function of MSRP for EVs sold in California in Q1 2022 versus internal combustion engine (ICE) vehicles sold in the U.S. in 2021.

Figure 2. Percentage of light-duty vehicle sales by MSRP range

Figure 2. Percent of light-duty vehicle sales by MSRP range

As shown in Figure 2, prior to applying federal, state, and local incentives, EVs are generally more expensive than their counterpart ICE vehicles. Additionally, as described earlier, the current average price of EVs is mainly a product of two dominant models (i.e., Tesla Model 3 and Model Y), which comprise almost 59% of the U.S. market. Unless EVs with lower prices can take higher market share in future, it would be hard to imagine a significant short-term drop in average EV prices in the next few years.

The vehicle price disparity combined with the lack of charging infrastructure make EVs inaccessible to lower income individuals and households. This again emphasizes the significant role that incentive programs will play over the next 10–15 years in transitioning the light-duty vehicle market away from fossil fuels to zero emission technologies.

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While incentives are critical, it is not reasonable to assume that they will be able to offset the premiums for every single EV sold in the U.S. Wide open access to incentives helped with initial commercialization of EVs, but now might be the time for federal, state, and local governments to have programs targeting low-income communities whose current access to EVs is almost impossible due to significantly high upfront costs.

While the Inflation Reduction Act (IRA) of 2022 puts income cap eligibility criteria ($150,000 for an individual, or up to $300,000 for a household) for federal EV tax credit, the incentive is not yet enough for low-income households to afford EVs. It should be noted that both the newly proposed as well as the existing federal EV tax credits are non-refundable which means that purchasers should owe at least $7,500 in taxes in order to get the full benefit. Often, the low-income households may not owe that much tax. This is why further policy changes are warranted to make EVs more affordable especially for low-income households.

However, such policy changes should come with more streamlined processes to ensure that funds can be expended as effectively and expeditiously as possible. Complex processes to verify eligibility could inhibit the successful implementation of incentive programs and thus reduce their effectiveness.

In addition, the pre-owned vehicle market provides a great opportunity for more affordable EVs. Inclusive and creative programs to include not only new but also used EVs would be beneficial. For example, California’s ACC 2.0 has developed a new concept to give credits to used zero emission vehicles coming off a lease. The IRA calls out a package of incentives for clean vehicles including pre-owned ones. As it stands right now, the IRA is planning to offer a new credit of $4,000 or 30% of the vehicle sale price (whichever is lower) for used EVs for purchasers with income less than $75,000 (or $150,000 for a joint return). This is certainly a step in the right direction to expand the used market of EVs and make them affordable for low-income households.

At ICF, we have partnered with various government clients to support increased EV adoption. State and federal governments will need to continue to focus on zero emission mobility within their jurisdiction through policy and program design, effective use of incentive funds, and other approaches (e.g., regulations, education, outreach).

Meet the authors
  1. Sam Pournazeri, Director, Clean Transportation and Energy

    Sam is a nationally recognized transportation and energy expert with more than 10 years of experience in air quality and climate change planning and policy development. View bio

  2. Stacy Noblet, Vice President, Transportation Electrification + ICF Climate Center

    Stacy is a transportation electrification expert supporting government and commercial clients with over 15 years’ experience. View bio

  3. Fang Yan, Environmental Modeling Manager