Electric cars are too expensive for many, even with help in the climate bill

Washington politicians are promoting electric vehicles as a solution to climate change. But an uncomfortable truth remains: Battery-powered cars are far too expensive for a large majority of Americans.

Congress has begun to try to solve this problem. The climate and energy package passed on Sunday by the Senate, the Inflation Reduction Act, will give buyers of used electric cars tax credits.

But automakers have complained that the credit will only apply to a narrow portion of vehicles, at least initially, largely because of domestic purchasing requirements. And experts say broader action is needed to make electric cars more affordable and get enough of them on the road to make a serious dent in greenhouse gas emissions.

High prices are caused by a shortage of batteries, of raw materials such as lithium and of components such as semiconductors. Strong demand for electric cars from wealthy buyers means that car manufacturers have little incentive to sell cheaper models. For low- and middle-income people who don’t have their own garages or driveways, another obstacle is the lack of enough public facilities to charge.

The bottlenecks will take years to resolve. Car manufacturers and suppliers of batteries and chips must build and equip new factories. Raw material suppliers must open new mines and build refineries. Charging companies are struggling to install stations quickly enough. Meanwhile, electric vehicles remain largely the province of the rich.

To some extent, car manufacturers are following their usual game plan. They have always introduced new technology at a luxury price. With time, the features and gadgets make their way into cheaper cars.

But emission-free technology is urgent such as voice navigation or massage seats did not. Transport accounts for 27 percent of greenhouse gas emissions in the United States, according to the Environmental Protection Agency. Battery-powered cars produce far less carbon dioxide than cars that run on petrol or diesel. This is true, even considering the emissions from the production of electricity and from the production of batteries, according to a number of studies.

Just a few years ago, analysts predicted that electric vehicles would soon be as cheap to buy as gasoline cars. Given the savings on fuel and maintenance, going electric wouldn’t be a bad idea.

Instead, high prices for items like lithium, an essential ingredient in batteries, helped raise the average sticker price of an electric vehicle by 14 percent last year to $66,000, $20,000 more than the average for all new cars, according to Kelley Blue Book.

Demand for electric vehicles is so strong that models such as the Ford Mach-E are sold out, and there are long waits for others. Tesla’s website informs buyers that they cannot expect delivery of a Model Y, with a purchase price of $66,000, until sometime between January and April.

With such high demand, automakers have little reason to target budget-minded buyers. Economy cars such as Toyota and Honda do not yet sell significant numbers of all-electric models in the United States. Scarcity has been good for Ford, Mercedes-Benz and other automakers that are selling fewer cars than before the pandemic but posting fat profits.

Automakers “are not giving more discounts because demand is higher than supply,” said Axel Schmidt, a senior managing director at Accenture who oversees the consultancy’s automotive division. “The general trend at the moment is that nobody is interested in low prices.”

Advertised prices for electric vehicles tend to start around $40,000, not including a $7,500 federal tax credit. Good luck finding an electric car at the semi-affordable price.

Ford has stopped taking orders for Lightning electric pickups, with an announced starting price of around $40,000, because it can’t make them fast enough. Hyundai announces that the electric Ioniq 5 will start at around $40,000. But the cheapest models available from New York-area dealers, based on a search of the company’s website, were about $49,000 before taxes.

Tesla’s Model 3, which the company began producing in 2017, was supposed to be an electric car for average people, with a base price of $35,000. But Tesla has since raised the price of the cheapest version to $47,000.

Even used electric cars are in short supply. Popular models like the Tesla Y and Ford Mach-E sometimes sell for thousands of dollars more used than they did new. Buyers are willing to pay a premium to get an electric car, even a used one, right away.

Joshua Berliner, an entrepreneur in Los Angeles, was in the market for a used Model 3 sedan, but discovered that prices were higher than for a new Tesla. “The same was true for almost all the brands we looked at,” Berliner said in an email.

Mr. Berliner, who owns a Tesla and wanted a new one for his wife, said he had become so desperate that he almost bought a gas car. “I wouldn’t normally consider internal combustion vehicles, but if gas prices were lower, I might have pulled the trigger,” he said.

The Inflation Reduction Act, which looks set to pass the House, would give used car buyers a tax credit of up to $4,000. The used car market is twice as large as the market for new cars, and that is where most people drive.

But the used car tax credit will only apply to those sold for $25,000 or less. Less than 20 percent of used electric vehicles fit that category, said Scott Case, CEO of Recurrent, a research firm focused on the used car market.

The supply of used vehicles will grow over time, Mr. Case said. He noted that the Model 3, which has outsold any other electric car, only became widely available in 2018. New car buyers typically keep their vehicles for three or four years before trading them in.

A $7,500 credit for new electric vehicles, another provision of the Inflation Reduction Act, would help push down prices across the board and filter down to the used car market, Mr. Case said. Automakers sold nearly 200,000 new electric vehicles in the United States from April to June. As the new cars age, used electric vehicles will become “available to a lot more people,” Mr. Case said.

The problem is that many new EVs may not qualify for the $7,500 credits. The Inflation Reduction Act sets standards for how much of a car battery must be made in North America with raw materials from trade allies. Several automakers and suppliers have announced plans to build battery factories in the United States, but few have begun production.

“Right now with our lack of capacity for materials, I don’t think there’s any product that would meet that today,” Carla Bailo, president of the Center for Automotive Research in Ann Arbor, Mich., said of the standards. “Tesla is probably close, but the rest of the manufacturers, no way.”

The legislation also excludes imported electric cars from the tax deduction. The provision is designed to protect American jobs, but will undermine the price advantage of Chinese brands expected to enter the United States. SAIC’s MG unit sells an electric SUV in Europe for around $31,000 before incentives.

New battery designs offer hope for cheaper electric cars, but it will take years before they appear in cheaper models. Predictably, next-generation batteries that charge faster and last longer are likely to appear first in luxury cars, such as those from Porsche and Mercedes.

Companies working on these advanced technologies claim that they will ultimately lower costs for everyone by packing more energy into smaller packages. A smaller battery saves weight and reduces the cost of cooling systems, brakes and other components because they can be designed for a lighter car.

“YYou can actually reduce everything else, says Justin Mirro, managing director of Kensington Capital Acquisition, which helped battery maker QuantumScape go public and is preparing an IPO for new battery maker Amprius Technologies. “It just has this multiplier effect.”

The Ministry of Energy is trying to encourage start-ups to focus more on batteries for the masses. In May, the department offered $45 million in grants to companies or researchers working on batteries that will last longer, among other things, to create a greater supply of used vehicles.

“We also need cheaper batteries, and batteries that charge faster and work better in the winter,” said Halle Cheeseman, a program director who focuses on batteries at the Advanced Research Projects Agency-Energy, part of the Department of Energy.

Gene Berdichevsky, CEO of Sila Nanotechnologies, a California company working on next-generation battery technology, argues that prices are following a curve like solar cells did. Solar panel prices ticked up as demand began to slow, but soon continued a steady decline.

The first car to use Silas’ technology will be a Mercedes luxury SUV. But Mr. Berdichevsky said: “I’m not in this to make toys for the rich. I am here to make all cars electric.”

A few manufacturers offer cars aimed at the less wealthy. A Chevrolet Bolt, a utilitarian hatchback, costs $25,600 before incentives. Volkswagen said this month that the entry-level version of its 2023 ID.4 electric SUV, which the German automaker has begun producing at its plant in Chattanooga, Tenn., will start at $37,500, or about $30,000 if it qualifies for federal tax credits .

Then there’s the Wuling Hongguang Mini EV, produced in China by a joint venture of General Motors and Chinese automakers SAIC and Wuling. The car is reportedly better than the Tesla Model 3 in China. Although the $4,500 price tag is unbeatable, many Americans are unlikely to buy a car with a top speed of barely 60 miles per hour and a range just over 100 miles. There are no signs that the car will be exported to the United States.

Eventually, said Bailo of the Center for Automotive Research, automakers will run out of wealthy buyers and target the other 95 percent.

“They listen to their customers,” she said. “Eventually, demand from high-income earners is going to slow.”