Defense Production Act Effect on EVs and the Market

Econ 301

18 April 2022

Defense Production Act Effect on EVs and the Market

The US Defense Production Act (DPA), first used in 1950 during the Korean War, has been invoked by President Biden on March 31, 2022, to increase production of inputs in the large capacity battery supply chain (Defense). Large capacity batteries are essential for transitioning to a sustainable and self-sufficient energy economy, such as electric vehicles (EVs) and renewable energy storage. Invoking the DPA to encourage production of critical materials for large capacity battery production will increase the number of batteries produced. Current lower electricity prices will increase the quantity demanded for EVs. Increased EV battery production and increased quantity demanded for EVs will lead to lower EV prices.

The US will have to increase the supply of battery inputs by mining critical materials such as lithium, nickel, cobalt, graphite, and manganese. If it is not grown, it is mined. Mining has turned into a word with a lot of negative connotations, and for good reason. It is often conducted on foreign soil where the US has no control or ability to regulate the operations and a lot of human rights and environmental violations occur. Everything we consume has an origin, and it is our responsibility to make sure those materials are sourced responsibly. When they are sourced in our backyards, those operations are more likely to be conscientious of employees and their environment. We cannot continue to claim ignorance as an excuse to not take responsibility for what we are consuming. Mining is necessary to produce renewable infrastructure, and therefore must be rethought and reformed to better serve our people and our surrounding ecosystem.  

One concern is how these mining operations may affect Native American communities. Biden’s press release said they would be working in accordance with Tribal governments to meet the DPA’s goals. Also, before the official DPA declaration, the Indian Country Today newspaper released an article by the Indigenous Environmental suggesting support of the policy (Bryan).

Increased supply of battery inputs will reduce the cost of electric vehicles (EVs). By increasing domestic battery production, US manufacturers will be able to have access to a more secure supply chain. Reduced reliance on other countries will make the US less vulnerable to input shortages making it easier to keep prices down. Lithium, a primary component in batteries, is still mostly mined in South America or Australia then shipped to China for processing before it is shipped to other parts of the world for use (LaReau). Manufacturing costs would also be lower due to our increased control over our raw materials markets, and to a lesser extent, reduced shipping costs. MP Materials Corp, the only US company that produce rare earth materials for EVs, is expected to receive $6 billion in Federal assistance under the DPA (Coppola). Although this is meager compared to the $4.5 trillion that is estimated for a full renewable energy transition (E360 Digest), it communicates to the US market that EVs are a less risky investment and sets precedent for continued support.  

Consumers, however, are unlikely to benefit from these lower production costs immediately. According to Sam Abuelsamid, principal analyst on E-Mobility at Guidehouse Insights in Detroit, prices are expected to be driven down in the next 3-5 years. But producers are likely to continue selling EVs at their same sticker price as production costs decrease, increasing their profit margins (LaReau). Maintaining the relatively higher prices may help producers keep up with the high demand which will only rise further as prices fall. In the meantime, it is still a comfort to be reminded that the average driver can save about $80 a month by not having to pay for fuel if they buy an electric car (LaReau). Due to these savings, it is always most economically feasible in the long run to buy an EV when it is time to buy a new car anyways.

With lower input costs, electric cars are bound to get less expensive and thus more affordable over time. The Westport police department and the CT EV club published a financial analysis of transitioning Ford Explorer police cars over to Tesla police cars. Although their report is effectively a case study, it has important implications for other police departments and average consumers alike. Their data is based on their first Tesla Model 3 which received some first-time police customization discounts. The discounts aided in the police department’s transition but considering not every police department may have access to such a first-time discount, it is more relevant to look at their estimates for buying their “next Tesla.” Their next Tesla Model 3, compared with the Ford Explorer, is also projected to recoup its marginal cost, and save the department an additional $1,200 within its first year of operation. By year four, the next Model 3 would cost $95,800, while the Ford Explorer would cost the department $120,200 (Westport). The price comparison implies that each new Model 3 on the squad would save the department $24,400 every four years. The savings primarily breaks down between maintenance and fuel savings. Teslas, and EVs in general, also have the added benefit of being safer. Teslas have 5-star crash ratings and collision avoidance technology, and EVs do not catch fire as often as gas vehicles per miles traveled (Westport and Halvorson). Electric cars are quality substitutes for internal combustion engine (ICE) vehicles and as long as gas prices are expected to remain higher than electricity prices in all states there is an incentive to purchase EVs. Although EV costs and benefits vary widely on model, location, and use, the public can construe that the financial analysis of other EV purchases is likely to be similar.

However, to encourage a faster transition, the Federal government could accelerate the impact of its DPA subsidies by also providing subsidies that specifically target the consumer market. If it is projected that EV sticker prices won’t fall in relation to their reduced price of production, the Federal government could ease that gap and make the transition to EVs faster and more equitable by incentivizing the consumer market. The lower consumer prices would increase the quantity demanded of EVs and would signal to all car manufacturers that it is worthwhile to produce more EVs. It would be beneficial for the Federal government to respond to this increase in demand as well by increasing support for renewable energy infrastructure such as retraining workers, encouraging more domestic (regulated) mining, installing solar, wind and hydro and respective energy storage, installing charging stations, and more. EV infrastructure that suits all kinds of living situations, besides just the households with a driveway, is vital in ensuring widespread EV adoption even when their upfront cost becomes more affordable. Making EVs practically and financially acceptable to all demographics would integrate US environmental goals with environmental justice (Marpillero). 

Another thing to consider is that rising energy prices may increase demand for electric cars. In 2021, the price of all energy sources, besides electricity, began to surge above the price of all goods and services. As the U.S. recovers from the pandemic, demand for goods, including energy, has increased. An overwhelming positive shift in demand has increased prices and congested the supply chain. A transitory price level rise was expected, similar to the post-Spanish flu epidemic. That is until the Russian invasion of Ukraine, which has further disrupted the supply chain. A combination of US sanctioning trade with Russia following the invasion and Americans’ related expectations of volatility in the markets brought energy prices up. Although only 8% of U.S. oil imports come from Russia, the volatility of the market still provides an opportunity for producers and distributors to raise prices (Ryssdal).

Reduced dependence on other countries for energy may combat inflation. Americans across the country are experiencing rising energy costs as the cost of fuel oil, propane, kerosene and firewood, and piped gas rise. Electricity is the only energy source that has remained about the same as prices increase on all goods and services. The western US is the exception with the rate of electricity prices rising by 20%. However, the West’s electricity price rise is still less expensive than all of the other energy source options in the region. If the US was less reliant on other countries for energy, there would be fewer variables, such as politics and shipping, that could send energy prices into such a fluctuation.

Reduced dependence on energy companies may combat inflation. Energy sources are relatively inelastic goods, people will continue to buy it even if the price increases, so producers and distributors are not incentivized to keep prices low, especially during times of economic upheaval. Utility companies, including Con Edison which services New York City, are often regulated to prevent rapid price increases. Con Edison is currently seeking permission from New York to raise their prices. Consumers need to have better control over the energy they buy and use. Transitioning to a decentralized renewable energy system would likely mitigate supply shocks and heightened price expectations and, thereby, price surges. Adding solar to the roofs of more households is a good example of a consumer-controlled, decentralized renewable energy system. If their buildings are equipped with sufficient battery storage, there would be no need to rely on the grid and be affected by the prices they set.

     If the DPA helps Americans become self-sufficient and less reliant on fossil fuels, the positive externalities could be tremendous. As demand and supply of renewable energy increases, it could help mitigate the effects of climate change, and help counteract the negative externalities of fossil fuels. Americans would save money and resources by no longer having to rely on energy sources that have been shipped around the world before use. There is freedom in domestic production and some of that freedom may finally be restored to Americans.

 

 

Works Cited

Bryan, Susan Montoya. “Climate groups call on Biden to invoke Defense Protection Act and resist short-sighted domestic fossil fuel policies.” Indian Country Today, 9 March 2022, https://indiancountrytoday.com/the-press-pool/climate-groups-call-on-biden-to-invoke-defense-protection-act-and-resist-short-sighted-domestic-fossil-fuel-policies. Accessed 17 April 2022.

Coppola, Gabrielle. “A $6 Billion Jolt for U.S. EV Supply Chains.” Bloomberg.com, 23 November 2021, https://www.bloomberg.com/news/newsletters/2021-11-23/a-6-billion-jolt-for-u-s-ev-supply-chains. Accessed 17 April 2022.

Crane, Lucy. “Mining Our Way to a Low Carbon Future | Lucy Crane | TEDxTruro.” YouTube, Tedx Talks, 21 January 2020, https://www.youtube.com/watch?v=aWTkiQ64u_U. Accessed 17 April 2022.

“Defense Production Act Title III Presidential Determination for Critical Materials in Larg.” Department of Defense, 5 April 2022, https://www.defense.gov/News/Releases/Release/Article/2989973/defense-production-act-title-iii-presidential-determination-for-critical-materi/. Accessed 17 April 2022.

E360 Digest. “Shifting U.S. to 100 Percent Renewables Would Cost $4.5 Trillion, Analysis Finds.” Yale E360, 28 June 2019, https://e360.yale.edu/digest/shifting-u-s-to-100-percent-renewables-would-cost-4-5-trillion-analysis-finds. Accessed 17 April 2022.

Halvorson, Bengt, et al. “Fires are less frequent in Teslas and other EVs vs. gas vehicles.” Green Car Reports, 17 August 2021, https://www.greencarreports.com/news/1133254_fires-are-less-frequent-in-teslas-and-other-evs-vs-gas-vehicles. Accessed 2 May 2022.

 

LaReau, Jamie L. “Biden invokes Defense Production Act: How it will help carmakers.” Detroit Free Press, 31 March 2022, https://www.freep.com/story/money/cars/2022/03/31/biden-cold-war-act-cars/7221303001/. Accessed 17 April 2022.

Marpillero, Andrea. “How electric cars can advance environmental justice: By putting low-income and racially diverse drivers behind the wheel.” The Conversation, 21 May 2021, https://theconversation.com/how-electric-cars-can-advance-environmental-justice-by-putting-low-income-and-racially-diverse-drivers-behind-the-wheel-158380. Accessed 17 April 2022.

Nedelea, Andrei. “Study: Hybrids, ICE Cars Far More Likely Than EVs To Catch Fire.” InsideEVs, 18 January 2022, https://insideevs.com/news/561549/study-evs-smallest-fire-risk/. Accessed 17 April 2022.

Ryssda, Kai. “An oil shock? In this economy?” Marketplace, 8 March 2022, https://www.marketplace.org/shows/marketplace/an-oil-shock-in-this-economy/.

Uteuova, Aliya, and Andrew Witherspoon. “What is causing US utility bills to rise and will it persist in warmer months?” The Guardian, 13 March 2022, https://www.theguardian.com/us-news/2022/mar/13/us-utility-bills-energy-prices-increase. Accessed 17 April 2022.

“Westport Police Tesla Squad Car Saves Money, Improves Performance, Environmentally Friendly | News.” Westport, CT, 22 July 2021, https://www.westportct.gov/Home/Components/News/News/8926/35?backlist=%2fgovernment%2fselectman-s-office. Accessed 17 April 2022.