EV Sales Set to Surge 60% in Q3 as Tax Credit Expiry Looms

The United States is poised to experience a significant surge in electric vehicle (EV) purchases during the third quarter of this year. This anticipated "EV buying spree" is a direct result of the upcoming expiration of a $7,500 tax credit for EV purchases, which is set to end on September 30. This policy change is expected to have a profound impact on major automakers, with Tesla likely to be the biggest beneficiary due to its dominant market position and the profitability of its vehicles.

The policy shift, enacted through the signing of the Inflation Reduction Act, includes several key changes. The $7,500 consumer tax credit for EV purchases and a similar credit for commercial EVs, including leases, will be phased out by the end of September. Additionally, the production tax credit for domestic battery manufacturing, which offers $45 per kilowatt-hour, will face stricter eligibility criteria.

Analysts predict that this policy change will significantly reduce the short-term penetration of EVs in the U.S. market. However, in the immediate term, the third quarter is expected to see a spike in EV sales as consumers rush to take advantage of the expiring tax credits. This trend is particularly notable for EV leases, which have seen a penetration rate of nearly 60% in recent quarters.

For instance, the monthly lease cost for a base model Tesla Model 3, currently at $349, is projected to rise to approximately $560 after the tax credit is removed. Tesla is likely to benefit the most from this buying frenzy due to its dominant market position and the profitability of its vehicles. It is estimated that about two-thirds of Tesla's U.S. sales benefit from the tax credit, translating to roughly 20% of its global sales.

Other automakers like Rivian, Ford, and General Motors may also see some benefits from the surge, but their gains could be limited by lower inventory and production levels. Rivian, in particular, may face constraints due to its relatively low production capacity. Ford and General Motors, while benefiting from the tax credit, are still operating at a loss on their EV models, which could cap their sales growth.

Following the third quarter, the fourth quarter is expected to see a sharp decline in EV sales, entering a period of reduced demand similar to what was observed in Europe after the end of incentives in previous years. The duration of this "hangover" period remains uncertain, but it is anticipated that the third quarter's EV penetration rate may be the highest for an extended period.

Globally, the EV market continues to show varied performance. In June, the global EV penetration rate is estimated to remain around 25%, similar to May. China continues to lead the market with a 53.3% EV penetration rate in May, accounting for 63% of global EV sales. Europe also showed strong performance with a 25.5% penetration rate in May, reflecting a significant increase. In contrast, the U.S. saw a modest increase in its EV penetration rate to 8.6% in May, still lagging behind the expected levels for 2024-2025.