As we head into the final weeks of the Biden administration, the ambitious goal it had set coming into office to build out a competitive American clean energy and electric vehicle industry is increasingly looking like a slow-motion train wreck. Yes, the administration is going to be obligating a lot more of the $390 billion in funding provided by the Inflation Reduction Act (IRA) before January 20. In addition, it seems unlikely that the incoming Trump administration will seek to roll back these subsidies. A disproportionate amount of the money is going to Republican-leaning states and districts and, therefore, would be politically difficult to rescind.
Much of this funding is intended to reshore portions of the EV supply chain from China, which has a massive lead over the United States due to the Chinese Communist Party’s decision back in the late 2000s to leave hybrid vehicles to be dominated by Japanese automakers and leapfrog directly to EVs with the aim of dominating the EV market as it eventually reached large-scale market penetration. The Biden administration’s approach represents not just a desire to challenge this dominance but also the national security implications of not having a full domestic automotive sector as the world, in their view, moves off fossil fuels for most transportation.
As Robert Manning and Mathew Burrows pointed out in their recent postmortem of the Biden’s foreign policy, the administration did not really address the questions of whether these industries would be competitive once subsidies end, whether there would be markets for them among U.S. allies and partners, or whether they would delay the energy transition by trying to replicate China’s existing industrial base. They had hoped that Europe, in particular, would buy into the concept of cooperative “friendshoring” with the United States. Instead, Europeans are upset that their companies are investing in the United States due to the subsidies and have responded with protectionist measures rather than opening their markets. Meanwhile, their tariffs on Chinese EVs will probably allow some market penetration, given prices as low as $10,000. This is due in part to the Europeans’ prioritization of meeting climate goals rather than allowing reshoring efforts to hinder the energy transition.
Apart from the lack of export markets protected from Chinese competition, with Trump’s electoral victory, one of the primary drivers of U.S. demand growth for domestic EVs and domestically produced inputs is in serious jeopardy. The new tailpipe emissions standards adopted by the Biden administration in March 2024, which Trump has promised to rescind entirely, effectively force the adoption of EVs because they reach a level that would be impossible to meet with more efficient gasoline engines. Under these rules, the Environmental Protection Agency (EPA) forecasts that 56 percent of new vehicle sales will be EVs by the 2032 model year, with an additional 13 percent plug-in hybrids or other partially-electric cars.
If Trump makes good on his promise to rescind the rules, it could throw the U.S. auto industry into disarray, given that they have already started to take steps to comply. This is not to mention all of the current investment in domestic production of EV components. The Big Three U.S. automakers, General Motors, Ford, and Stellantis, are lobbying for the rules to be at least partially preserved, but it seems likely that Trump will at least make a sharp rollback of the targets.
Part of the reason for Trump’s promised regulatory rollback is the preferences of his rural and suburban voters and many other American consumers outside major cities who drive a lot of miles. Despite subsidies from the IRA, the rollout of EV charging infrastructure has been slow, and it is heavily concentrated on the West Coast and in the Northeast, where annual vehicle mileage tends to be low. In the “red state” heartland, there are very few charging stations off the interstate highways. When EVs were new, companies like Tesla had waiting lists to obtain pricey cars. Now, sales are flatlining as that “early adopter” market of affluent Americans eager to do their part for the environment and willing to pay a price premium is satiated. JD Power and Associates had initially forecast a 12 percent market share for EVs this year but trimmed that back sharply in August to only 9 percent. Another problem is that while EVs are more expensive than the same gasoline models, poor resale values are making the full life cycle cost even higher for the majority of new car buyers who trade in rather than keep the vehicle as it ages. To be sure, sales are still rising. However, the transition would definitely be undermined if the federal mandate via emissions caps is rescinded.
Pulling all of these data points together makes one wonder whether the United States is really capable of implementing industrial policy coherently. China was able to move first into the EV space and take market dominance in a way that will be hard to dislodge. But the U.S. effort lacks sufficient coordination with U.S. allies and partners to develop a significant protected export market, and the polarization of the U.S. electorate on the question of whether the transition away from fossil fuels in transportation is even important enough to subsidize makes it difficult for the United States to pursue a similarly coherent strategy. In the end, we may be left with what is essentially misallocated capital—expensive subsidized production capacity without enough demand to justify it—while our our putative friend-shoring partners buy cheaper Chinese goods anyway.
Greg Priddy is a Senior Fellow at the Center for the National Interest and does consulting work related to political risk for the energy sector and financial clients. Previously, he was director of global oil at Eurasia Group and worked at the U.S. Department of Energy.
Image: Gorodenkoff / Shutterstock.com.
