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Who’s Winning on Consumer Climate Incentives: the US or Europe?

·11 min read

(Bloomberg) -- The Inflation Reduction Act signed into law last month ushers in unprecedented incentives for American consumers interested in decarbonizing their lives, including rebates and tax credits for electric vehicle purchases, home-electrification upgrades, heat pumps and solar panels. In many cases, those incentives also bring the US into closer alignment with countries in Europe that have a longer track record with similar climate-centric policies.

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Similar, but not identical. Here’s how various incentives geared at personal decarbonization are being approached in the US versus Europe.

Electric car adoption

What the US does

EVs’ current market share in the US (including plug-in hybrids) is less than 5% among new car purchases. The Inflation Reduction Act includes point-of-sale tax credits for new electric vehicles (up to $7,500) as well as used EVs (up to $4,000). Bigger rigs — electric SUVs, pickup trucks and vans — need to cost less than $80,000 to qualify for the credits, while the cap is set at $55,000 for smaller vehicles and $25,000 for used EVs. Income restrictions apply, as do rules around where eligible cars can be manufactured. Some US states offer additional cash incentives for EV purchases.

The European comparison

In less than a decade, Norway has radically changed the composition of its vehicle stock. Six years ago, according to the Norwegian Electric Vehicle Association, fewer than 5% of the cars on its roads were electric, including plug-in hybrids. Now nearly 25% are. Last year, more than 85% of new-car purchases in the country were plug-ins.

The method for achieving this was simple: By including CO2 and NOx emissions when calculating taxes for new-car purchases, and exempting EVs from various taxes, Norway increased the cost of gasoline-burning cars and reduced it for electric models. “Technically there's no incentive for EVs,” says Scott Hardman, assistant director at the Plug-in Hybrid & Electric Vehicle Research Center at UC Davis’s Institute of Transportation Studies. “You don't get a rebate or tax credit or anything; you just don't pay these quite high taxes.”

Hardman says the tax difference between an EV and a comparable gasoline car can be as much as $15,000. Norway also limits ferry charges for EVs, allows them some access to bus lanes, and ensures “charging rights” for apartment dwellers. The country’s approach has been so effective that this year it started walking back EV incentives — including toll exemptions and free parking — to encourage walking and use of public transit.

Under the IRA, the US and Norway now share one important similarity: Instead of making buyers wait to file their tax returns, credits are granted at the time of purchase. Research shows that consumers strongly prefer this type of incentive: One study by the US Department of Energy’s National Renewable Energy laboratory found that retroactive rebates are about half as effective as immediate discounts in motivating EV purchases. Another from researchers at George Washington University found that US consumers, on average, place about $1,450 less value on a $7,500 tax credit than they do on the same sum applied as a point-of-sale discount.

But Norway has achieved such widespread EV adoption in such a short period of time by taking a holistic approach aimed at an ambitious goal: ensuring all new cars sold in 2025 are zero-emissions. The US, which is shooting for 50% EV sales by 2030, is still primarily focused on making electric vehicles more affordable.

Where the IRA also fails compared to Norway and other European countries, says Hardman, is in its complexity. The law's various restrictions are also likely to cause confusion. Some limits take effect immediately whereas others are phased in over time and they include provisions on where vehicles are made, how much they cost and how their batteries are sourced. “In other countries, you go to a dealer, you know what you are going to get,” he says. “The dealer understands it. The consumers understand it. Whereas here, no one really knows.”

E-bike adoption

What the US does

Not much! Although the $2 trillion Build Back Better bill that passed the US House last year included a $900 rebate for purchasing an e-bike, that provision didn’t make the Inflation Reduction Act. The omission stung e-bike makers and advocates who had hoped that the federal government would put its fiscal might behind not just convincing consumers to opt for electric cars but getting them out of cars entirely. For now, rebates are limited to state and local incentives. Vermont and Massachusetts, for example, have both instituted programs, with Colorado and California planning to introduce their own soon.

The European comparison

Adding insult to injury, just three days after President Joe Biden signed the IRA into law, the French government announced that it was boosting the payout in its e-bike incentive program to as high as €4,000 euros ($3,986). To be eligible for the full rebate, residents need to trade in an old car and live in one of the country’s urban low-emissions zones. (Outside of these select city centers, the incentive is capped at €3,000 euros.) The program, similar to one launched in Lithuania in 2020, is a new twist on the cash-for-clunkers idea, which was deployed by the US in 2009 to encourage drivers to trade in old cars for newer, more fuel-efficient models.

“This is a bold move for France,” says John MacArthur, sustainable transportation program manager at Portland State University’s Transportation Research and Education Center. While France still trails the Netherlands, Germany, and Sweden in e-bike adoption, says MacArthur, no other country offers a fatter rebate. In Paris, mayor Anne Hidalgo has also promised to add 130 kilometers of bike lanes, at the expense of car lanes.

Purchase rebates aren’t the only way to boost bike usage. For every kilometer of biking to their workplace, Belgians are eligible for a tax discount of 25 cents. “It accumulates and really helps getting people to switch,” says Maya Ben Dror who leads Sustainable Automotive and Mobility work at the World Economic Forum in Geneva.

Public transportation

What the US does

As e-bike advocates contend, a simple replacement of combustion cars with electric cars won’t be enough to reduce emissions as much as needed: What’s required are other modes of transport entirely. “There is a consensus amongst mobility experts now that public transit ideally would be the backbone of how people move through the city,” Ben Dror says. But the Inflation Reduction Act glosses over the role of public transit at a time when many public transit agencies are still suffering in the wake of the pandemic.

The European comparison

Europe's historic cities tend to be denser than many American counterparts, which helps make public transportation a faster and more efficient option for getting around in a lot of cases. But they also employ a number of incentives for consumers deciding between riding and driving. Austria, for example, offers the “KlimaTicket,” which allows subscribers to use the country’s entire range of public transit options for a whole year. More recently, Germany experimented with a country-wide 9-euro ticket, which allowed passengers to ride all modes of public transport except for high speed trains throughout the country. The program ceased after three months, and now Germans are debating whether a similar program should be available on a more permanent basis.

Other European capitals are planning further investments in public transit expansion: The British capital has finally opened the new Elizabeth Line, running 73 miles in South-East England, tunneling underground through central London. Paris is planning to open new and add to existing Métro lines by 2030. The project Grand Paris Express will make the French capital’s Métro network Europe’s biggest. Berlin’s public transport system will get an additional 35 million euros of investments to improve the existing infrastructure and add a new S-Bahn line.

“What makes all these schemes stand out is the fact that they make traveling without a car easy and convenient,” says Barbara Stoll, director of Clean Cities Campaign at Brussels-based think tank Transport & Environment. “People have options and can move seamlessly between the various modes of transport. If you add in the magic dust of making public transport affordable, there should be no reason why people wouldn't want to choose” cleaner alternatives.

Switching to heat pumps

What the US does

The IRA offers a rebate of up to $8,000 to purchase heat pumps, as well as $1,750 for heat pump water heaters and $840 for an electric induction stove. The incentives are limited to households that earn up to 150% of the median income in their area and families can collect a maximum of $14,000 in rebates.

The European comparison

In the wake of Russia’s invasion of Ukraine, Europe is ramping up installation of high-efficiency electric heat pumps, which heat and cool homes and can supply hot water, to help eliminate its dependence on imported natural gas. In March, the European Commission unveiled its REPowerEU initiative that calls for doubling the deployment of heat pumps over the next five years.

“What Putin didn’t understand with his war is that the normal European citizen doesn’t feel secure with gas anymore,” says Thomas Nowak, secretary general of the European Heat Pump Association, an industry group. “The heat pump market is growing fast but that growth is limited by installation capacity and the availability of heat pumps.”

More than a dozen European nations offer subsidies to purchase heat pumps. France provides up to 11,000 euros ($11,022) for the installation of a heat pump, while Germany pays 45% of the cost of replacing a home’s oil-powered heating system with a heat pump and 35% of the cost of switching from other fossil fuels. But Italy may take the cake: The country is so determined to ditch fossil fuels that it pays the entire cost of a heat pump system and gives a homeowner a 10% “superbonus” to cover any administrative surcharges.

Installing home solar

What the US does

The IRA restored a 30% tax credit for residential solar in the US and extended the program until Jan. 1, 2034. It also offers a 30% tax credit for home battery storage systems, a subsidy not widely available in Europe.

The European comparison

Most European countries that subsidize residential rooftop solar pay homeowners a premium on the electricity their systems supply to the power grid. A few nations — Italy, Lithuania, Sweden — offer tax credits or rebates to install solar panels. A survey released in May by the Climate Action Network Europe rated France and Germany as among the countries offering the best subsidies for rooftop solar.“The type of support schemes vary a lot in the different European countries and there are no standard elements of comparison,” survey author Francesc Cots, a senior researcher at Eco-Union, a Barcelona, Spain-based nonprofit, said in an email.

The biggest incentive to go solar, though, is soaring electricity prices, according to Jenny Chase, head of solar analysis at BloombergNEF in Zurich. “Basically things are total chaos on residential and commercial (and wholesale) energy markets in Europe,” she said in an email. “Electricity prices are rising at a rate which is sending users — especially in the UK but also elsewhere — into a panic.”

Europeans are rushing to rooftop solar regardless of available incentives. BloombergNEF forecasts a 42.5% increase in installed residential solar capacity from 2021 to 2022.

Who incentivized it best?

Across the board, the US is finally starting to focus on some of the same initiatives and goals that have proven successful in European countries. The fact that European models already exist also means US policymakers have plenty of examples to look toward. Some of the best federal and state policies could come from cherry-picking what’s worked elsewhere.

But whether it’s buying an electric car, switching your commute to an e-bike, hopping on the train, installing a heat pump or deciding to go solar, European countries still tend to be out ahead. This year added a dose of urgency, between the energy crisis spurred by Putin’s war in Ukraine and the extreme-weather harbinger of widespread drought and heat waves. But Europe is also proving the power of collective policy: grouping together incentives that make the clean-energy option the most efficient, convenient, inexpensive and obvious.

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