The Effects of “Buy American”: Electric Vehicles and the Inflation Reduction Act

We study electric vehicle (EV) tax credits in the US Inflation Reduction Act (IRA), the largest climate policy in US history, with three goals. First, we provide the first ex-post microeconomic welfare analysis of this central component of the IRA. Event studies around changes in eligibility for EV tax credits show credits were largely passed-through to consumers. Additionally, domestic content restrictions on tax credits for purchased vehicles have driven enormous shifts to leasing. Our equilibrium model shows that compared to pre-IRA policy, IRA EV credits generated $1.87 of US benefits per dollar spent in 2023, at taxpayer cost of $32,000 per additional EV sold. Compared to scenarios with no EV credits, however, the IRA EV credits created only $1.02 of benefits per dollar of government spending. Second, we characterize the gains from policies targeting heterogeneity in externalities across vehicles. We find that relative to uniform credits, differentiating credits across EVs according to their heterogeneous externalities would substantially increase policy benefits. Third, we quantify tradeoffs in the IRA EV credits between foreign and domestic welfare and between trade and the environment. We find that the IRA EV credits benefit the environment but undermine trade, since they decrease global carbon emissions but use profit shifting to decrease foreign producer surplus. A controversial IRA loophole that removes domestic content restrictions on tax credits for EV leases has negative domestic benefits.