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The Treasury Department announced in June that it had paid about $1 billion in EV rebates in the first six months of the year.
The $7,500 federal electric-vehicle rebate was always likely to be the most endangered of the Biden administration’s clean-energy investments. Tax breaks for building factories at least creates jobs and, perhaps more important, corporate stakeholders. But the EV rebates benefit consumers whose lifestyle choices are coded as liberal. States that didn’t vote for Trump lead the way on EV adoption. This fits with the “punish my enemies” imperative of the Trump administration.
But there was a hitch here: Elon Musk decided to become Donald Trump’s biggest and wealthiest fan. For a moment, you could see the EV rebates sticking around. After all, nobody has thrived more off those rebates, including the ones in place before the Inflation Reduction Act, than Tesla.
Unfortunately, that is not the logic of the would-be monopolist. You look around at you and your competition and wonder who would be hurt the most by a government action, and if it’s everybody else, you endorse it. That’s the logic behind Tesla’s apparent support for eliminating the rebate: essentially pulling up the ladder after climbing it themselves.
Reuters was the first to report that the EV rebates would be on the way out, and that Tesla has told the Trump energy transition team—which includes none other than oil billionaire Harold Hamm—that it would be OK with that. Ending the rebates would position Trump on the side of Big Oil, but it also helps, in a small way, to solve a burgeoning fiscal problem.
Trump and the Republicans want to extend tax cuts that were massively tilted toward the rich, and add on about a dozen other tax cuts Trump gave away like candy during the campaign. This is going to bust the budget, which has already got fiscal conservatives breaking out in hives. One way out of the hard choices to follow is to find “offsets” that will either raise revenue or bring back savings. That’s kind of the purpose of Tesla CEO Musk’s other effort, the Department of Government Efficiency (DOGE).
The Treasury Department announced in June that it had paid about $1 billion in EV rebates in the first six months of the year. Multiply that out over a decade and you have $20 billion. Even if it were twice that, it would be a drop in the bucket compared to the trillions of dollars in red ink that extending and expanding the Trump tax cuts would create. But Republicans will be desperate for just about any offset once they get hit with the recognition that tariffs and fake DOGE charts about government waste aren’t going to fill that budget crater.
So what is Tesla’s calculus? As Musk himself said on an earnings call in July, Tesla was the first mover in the EV transition in the U.S., and is simply better positioned to do away with the EV incentives, after making good use of them for many years.
Tesla was the first mover in the EV transition in the U.S., and is simply better positioned to do away with the EV incentives.
Tesla has dropped from an 80 percent share of EV sales in 2020 to less than 50 percent last quarter. But it still has so much more EV manufacturing experience that it can better manage the loss of the subsidy. Ford and General Motors and other legacy automakers, on the other hand, need those subsidies to make their vehicles more affordable and bridge the gap to getting their production chains in place, as do startups that are trying to gain a foothold in the market.
Despite the hype over the waning EV transition, these legacy automakers were actually ramping up sales, particularly GM, which is now the second-largest American EV maker. But as they build out their factories, the losses have been high. Not even GM has reached EV profitability yet. And now it’ll be harder to sell those vehicles, leading to more losses. A National Bureau of Economic Research paper from October estimates that eliminating the rebates will reduce EV registrations by about 300,000 per year.
Combined with the elimination of the tax incentives for sales is the regulatory structure that was newly instituted by the Biden administration, putting in place strict emissions standards. That is almost certain to go, meaning that automakers would have no carrot or stick to build EVs. You could expect the more established firms to sink back to internal combustion engine vehicles, especially if they don’t have stringent tailpipe emissions limitations.
Tesla is getting battered in China and is simply not keeping up with global competition. All domestic automakers would be damaged in an industry that’s clearly going electric. Other countries are spending heavily to keep pace with Chinese subsidies, and Biden’s previous U.S. investments. But Trump is planning to continue a holdover policy from the Biden administration and close off the U.S. to foreign EVs. Tesla is effectively retrenching, trying to increase its relative position in the U.S., even through policies that would hurt the company globally. The result will be a cramped, puny U.S. auto industry that isn’t all that exportable.
Importantly, the $7,500 rebate was reserved for vehicles that shifted their supply chains to the U.S., including batteries and critical mineral components. Without that incentive, auto companies could pivot back to sourcing materials from China, which will be likely hit with high tariffs. So no matter what companies do, making electric vehicles will get more expensive, and amid that uncertainty, the one company that has their supply chain mostly in place will benefit: Tesla.
Is there going to be any internal resistance to a dramatic reversal for the EV transition and the reduction of fossil fuel pollution? I would watch the two Republican senators from Tennessee, Marsha Blackburn and Bill Hagerty. Volkswagen has a big EV factory in Chattanooga (recently organized by the United Auto Workers) and other proposals from GM and Ford in the state. If they aren’t going to defend the EV rebate, nobody will. Other Republican lawmakers in Indiana, North Carolina, and South Carolina will have to decide whether to stand with Trump or their own constituents’ jobs.
There are certainly coalitions and trade groups that will want to save the EV tax credits, but there’s a bit of mystery to them. There are actually two sets of tax credits, one for sales (the consumer rebate) and one for the production of EV and battery facilities. The reports I’ve seen about mobilizing to save the tax credits seem more focused on the latter. But of course they are connected; if demand suffers from losing the $7,500 rebate, it doesn’t matter if the factory can be built more easily.
The sunk cost of existing investment means that auto companies won’t pull out of making EVs entirely. But it will be more of a niche market, likely with substandard infrastructure for charging, especially on long trips. (The Biden administration provided federal money for EV chargers; that could also go away.) Tesla has an advantage there too with its Supercharger network, and with Elon Musk sitting at the feet of the president, that’s sure to be official policy across the auto space.
Whether the EV industry will be strangled, as it was in the 1990s, or not might depend on whether there’s a surge of demand in the final weeks of the year. A strong quarter could give all automakers a renewed push to defend an EV transition that’s working. Otherwise, you may have only one option to go electric in the future, and if you don’t like how the Cybertruck looks, tough.
