60% of $18B in US clean energy tax credits went to top 20% by income; 90% in the plug-in program

The most extreme case, Severin Borenstein and Lucas Davis found through their examination of tax return data from the IRS, is the program aimed at electric vehicles—the top income quintile received about 90% of all these credits. As a result of the work, Borenstein and Davis conclude that tax credits are likely to be much less attractive on distributional grounds than market mechanisms to reduce GHGs.

It can often be easier politically to introduce subsidies than taxes, but the two are not equivalent. Probably the single biggest limitation of technology-based subsidies is that they don’t achieve the efficient level of usage, but economists have pointed out other limitations as well. For example, Holland et al. (2015) shows that the external benefits from electric cars vary widely (and can even be negative) depending on how electricity is generated.

Even after the credit, electric and plug-in electric drive vehicles are expensive compared to equivalently-sized gasoline-powered vehicles. Another possible explanation is that in “green” communities (which tend to be high income), driving an electric vehicle could be perceived as a symbol of status.

It would seem difficult, therefore, to prefer tax credits over a carbon tax on distributional grounds. There may well be political considerations that continue to favor tax credits, but this approach comes at real cost, both in terms of efficiency and equity.

Source via GCC