Do Electric Cars Depreciate Faster than Gas-Powered Cars?

Do Electric Cars Lose Value Faster than Conventional Cars?

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The transportation sector represents around 20% of global greenhouse gas emissions, so decarbonizing transportation is critical to align the world’s emissions to targets that will limit the worst effects of climate change. Best-available research shows that electric vehicles mainly running or entirely on battery technology significantly reduce GHG emissions compared to conventional petroleum-fueled vehicles across the car's life cycle. However, to realize the potential GHG emission savings from a transition to more electric vehicles (EVs) requires (i) more consumers buying new EVs and (ii) a robust used car market for EVs. How well EVs retain their value relative to their original purchase price matters both to buyers of new EVs (who will want to capture value when it’s time to sell their car) and those in the market to purchase a used EV (who want a good deal and trust the car will last for some time). Newly-published research examining details of more than 9 million used vehicle listings found that EVs do not hold their value as well as comparable conventional (gasoline and diesel-consuming) vehicles, but this evidence is skewed in part by the newness of EVs and the gap between EVs and conventional vehicles narrowed in recent years as battery technology improved. These findings, coupled with other evidence suggesting modern EVs should have lifespans comparable to that of conventional vehicles - around 15 years - suggest growing consumer acceptance of EVs and a strong signal that the promise of EVs to decarbonize the transportation sector could be realized.

The Growth in the Electric Vehicle Market

Transportation accounts for about 20% of global greenhouse gas (GHG) emissions (see the figure below). Because of the global push to decarbonize the world in accordance with science-based targets to mitigate the negative effects of climate change, electrifying the transportation sector has been seen as an important movement to reduce reliance on vehicles powered by gasoline or diesel fuel.

One of our favorite graphs at Sustainability at the Frontier is courtesy of Climate Watch and Our World in Data. It shows that Transport comprises about 20% of the total global GHG emissions.

You might be thinking, “Wait, I thought electric cars have been around for more than 100 years—is the introduction of electric vehicles really news?” and you’d be partly right. Although the first vehicles powered by electricity were invented in the early 1830s, serious uptake of electric cars has only occurred in the past 15 or so years, owing mainly to advancements in battery technology and the deployment of charging infrastructure to serve the masses.

The first EVs appeared in the 1830s, and according to Car and Driver, mid-1800s prototypes were destroyed by railroad workers concerned about the effect that EV growth might have on their job security. Image courtesy Getty via Car & Driver.

Before going further, let’s establish some things about electric vehicles. First, here are some definitions that we’ll use in this post:

  1. Conventional Vehicle (CV): A gasoline or diesel-powered car.

  2. Hybrid Electric Vehicle (HEV): A car with a small battery that nearly completely runs on gasoline or diesel fuel. The battery alone can only power the car for a mile or so.

  3. Plug-In Hybrid Electric Vehicle (PHEV): A car with a larger battery (relative to HEV) that runs short (10-50 miles) distances on battery, followed by gasoline or diesel fuel when the battery charge runs out.

  4. Battery Electric Vehicle (BEV): A car that only runs on electricity from batteries.

We see a spectrum of options, with batteries providing anywhere from no energy to power a vehicle (CV) to all of it (BEV), with some partial in-between flavors. Automobile manufacturers have begun developing more production capacity for some flavors of EV—the number of EVs on the road in 2023 was six times greater than in 2018, according to the International Energy Agency.

We will probably see more EVs than other high-concept cars like “The Homer: The Car Built for Homer.” However, The Homer’s $82k price point (1991, or $192k in today’s dollars) resembles some higher-end EVs.

EV sales rapidly accelerated around 2018, primarily because of the scale-up in Tesla Model 3 availability. The figure below shows US EV and PHEV sales. We saw a slight bump in PHEV sales around 2017, but absolute sales represented less than half of BEVs in 2018 and 2019.

Comparing Relative Emissions of CVs and EVs

Let’s now explore the question of how EVs compare to CVs on a greenhouse gas (GHG) emissions basis. The figure below compares averaged data of the four primary vehicle archetypes based on an assumed number of miles driven in a given year (around 11,000). The BEV emissions are far less than the others, and the PHEV emissions are pretty good compared to the HEV and CV.

BEVs have far lower carbon dioxide emissions than PHEVs, HEVs, and CVs. The data here assumes an average annual distance traveled of 11,579 miles and the US national average electricity grid mix. Areas with higher-than-average renewables in the grid will show BEVs and PHEVs outperforming others, while electricity grids with a lower proportion of renewables will narrow the gap between electric and gasoline vehicles.

But carbon dioxide emissions during a car’s active life represent only one piece of the GHG puzzle. Going a level deeper, we can consider the emissions of a given type of car by looking at its entire life cycle. So-called life-cycle analysis (LCA) is a simple-to-understand (but often hard-to-execute) methodological tool commonly used in various sustainability-related disciplines. Part of the LCA process involves creating an inventory along the multiple discrete steps of a process or a product (e.g., cars), summing up the GHG emissions and other environmental metrics along the way. Although in most cases the bulk of all GHG emitted from a car comes from the use phase, or when it’s being driven, an LCA lens is more holistic so we can account for everything.

Let’s take a look at the results of a recently published comparison of the GHG emissions profile of various types of cars that considered emissions from vehicle production, use, and end-of-life disposition:

BEV and PHEV have far fewer carbon dioxide emissions when you consider the entire life cycle of a car, from production to use to final disposition. These results are for mid-sized vehicles, but the trend generally holds across multiple vehicle types. As you can imagine, many factors can influence a vehicle’s efficiency (e.g., the car's weight, the available motor power (which can affect how fast one might drive), etc. I’m deeply sorry that my graphing software prevents me from making the “2” a subscript in “CO2”.

OK, even when we account for the full life cycle of various types of vehicles, we can still see that BEVs and PHEVs outperform CVs that run on gasoline or diesel in terms of total GHG emissions. Although data in the above figure is for passenger vehicles (i.e., does not include things like semi trucks, buses, etc.), the trend of life-cycle performance of EVs generally holds across vehicle types, with some exceptions.

New Study: How Quickly Do EVs Depreciate Compared to CVs?

Now that we have established that (i) the transportation sector is one of the most important to decarbonize globally and (ii) most modern BEVs and PHEVs show a drastic decline in life-cycle GHG emissions and therefore, BEV and PHEV adoption is critical to decarbonizing the transportation sector, let’s dig into the topic of broader EV adoption by examining some compelling data from a new study published by Roberson and co-authors in the highly-cited open access journal Environmental Research Letters, who examined resale value trends for millions of used EV and CV vehicle listings over a multi-year period.

Why is examining the resale market of EVs interesting? First, let’s first put the current market penetration of EVs in context. We showed earlier how EV sales have rapidly accelerated in recent years, but today, EVs only comprise around 5 or 6% of vehicles driven in the US. Several EU countries have far greater EV penetration (here’s a good WRI article detailing other country-level estimates). Some estimates suggest that EVs need to comprise a market share of at least 75% by 2030 for the transportation sector to align with science-based GHG emission reduction targets associated with climate change's worst potential effects. Thus, for the potential of greater GHG emissions reduction from EV adoption, there needs to be greater sales of new EVs, and used EVs must have a viable and robust resale market. If EVs are not retaining their value or other issues are preventing EV uptake on the secondary market, then the climate benefits of EVs will not come close to being fully realized. Also, suppose EVs do not hold their value well. That will influence the purchase rates of new EVs because owners will be concerned about their ability to sell the car reasonably whenever they decide to move on to a different vehicle.

A few previously published research articles showed that EVs do not retain value as well as CV counterparts. But past studies were limited by fairly small data sets - for example, previously-published work on the topic looked at anywhere from 72 used car listings to almost 600,000. In this new paper, the authors pulled data from more than 9 million used vehicle listings from more than 60,000 sellers or dealerships to examine how resale value across various car models compares between CV, HEV, PHEV, and BEV.

The figure below shows one of the key takeaways - we can see in the left panel that the vehicle value retention rate - which is the used car sales price divided by its new manufacturer’s suggested retail price (MSRP) when that vehicle was new based on the model, trim, etc. - is nearly identical between CV and hybrid cars, with almost perfect overlap (the dark line in each graph represents the median value of the vehicle value retention rate, and the color-coded shaded boundaries represent the 25th and 75% percentile, respectively.

This figure is from the Roberson et al. paper. We can see that Tesla has a high retention rate if the car sells within the first couple of years of purchase but then steeply declines around year 3. Interestingly, PHEV and non-Tesla BEVs have a similar trend to CV, whereby value is highly retained within the first couple years of purchase, followed by a steep decline and an overall depressed retained value relative to conventional vehicles. Follow a similar trend. The solid line in each panel represents the median retention rate. The retention rate is calculated as the used car sales price ratio divided by its original MSRP.

The middle panel in the figure shows us that newer-vintage PHEVs retain their value better than CVs if the model is less than a couple of years old, but then the value retention drops for vehicles over 2.5 years old. The authors displayed value retention in the right panel for Tesla and non-Tesla BEVs. We can see that the median value retained by Tesla performs well compared to CV for the first few years of the vehicle’s life, followed by a bit of convergence around the CV value retention starting around year 5. However, the non-Tesla BEV value retention at nearly all points fares poorly compared to CV, except for a roughly new BEV.

As you’d expect, the binary question of “Is this an EV or not?” only has a partial bearing on the actual retained value of a given vehicle. The authors looked at a bunch of other dimensions in their analysis to understand the extent to which the following factors seemed to influence the value retention of a given vehicle across multiple model years:

  1. Vehicle mileage

  2. Time the car is on the market

  3. Operating cost

  4. Amount of available driving range remaining

  5. Whether or not the original EV owner received a federal subsidy

One consistent result is that a larger number of driven miles negatively affected the car’s value retention across all vehicle types—roughly a 5% decline for every 10,000 miles driven. Also, somewhat expectedly, the amount of available driving range for non-Tesla BEVs had a hugely positive effect (+5.6% for every 10 miles of additional available range) on the value retention rate, far greater than that for Teslas (+1.6%).

Another compelling observation was the effect of a US Federal tax subsidy that’s been in place for several years on value retention. In brief, you can claim up to a one-time $7,500 tax credit for purchasing a designated “clean energy vehicle.” The authors found that cars eligible for the $7,500 tax credit tended to have a lower value retention rate, likely in part because of how they computed the retention rate (which didn’t adjust MSRP to reflect tax subsidies) and that a seller may factor into their sale price the fact that they received a large tax credit when they originally purchased the vehicle, which could be for a couple of reasons.

OK, one of this study’s key results is that BEVs and PHEVs do not retain value as well as CVs, at least for the model years examined. Does this spell doom for the potential uptake of EVs going forward? Not so fast.

Another key observation the authors teased out of their massive data set is how the retention value for most non-Tesla BEVs has dramatically improved in recent years. We can see in the figure below that four different popular BEV makes and models experienced a substantial uptick in retention rate from 2014 to 2018, which the study authors largely attribute to the improved total driving range. This trend does not hold for Tesla’s flagship mass-market Model S. The authors attribute the Model S trend in part to a “diminishing returns” idea for driving range and that there’s probably some midway point that the average consumer finds desirable - and in fact if we eyeball the figure below, we can see that the trendlines would probably converge around 200 miles of driving range, which is (probably not coincidentally) seemingly the value that most new EVs ship with these days.

This figure (Figure 3 in the original study) shows that steady improvements in battery efficiency - and, therefore, the total amount of range one can drive before charging the vehicle again - dramatically positively affect the value retention rate for several popular models of BEV. The trend doesn’t hold for the Tesla Model S, though probably.

So, I think the best way we can draw the main conclusion is that while CVs do not lose resale value as quickly as BEVs and PHEVs, the value retention of BEVs and PHEVs is getting better and will likely be unlocked by future models having a “good enough” range for the average consumer. Let’s also consider a related factor likely influencing value retention, and that is the useful life of the vehicle.

The NHTSA estimates that the average useful life for a passenger CV is around 15-20 years. So if we consider a consumer purchasing a new car, they’ll be “locked in” to the higher GHG emissions profile of that CV for its useful life, and that occurs whether the original owner keeps the car for its entire life or whether they sell it to someone else.

Unfortunately, we do not have great longitudinal data indicating how long the average EV might last because EVs are relatively new. However, we have some promising evidence suggesting service lifetime may be similar to CVs. Telematics company Geotab tracked driving data for 21 different EV models spanning more than 6,300 individual cars, finding that the battery life degraded on average about 2.3% annually (see figure below). These battery data may be a valuable proxy to understand the lifespan of EVs, as the battery is considered the most important and likely most expensive piece of the equation for how long an EV will last (or not). We can see the averaged data across all vehicles goes out around 7 years, which is far less than the 15-20 CV life, but this limitation is a reflection for how long EVs could have been tracked. There are tons of Youtube videos showing older-vintage Teslas with hundreds of thousands of miles - time will tell to see how other BEV and PHEVs stand the test of time, but early returns are positive.

The range of EV and PHEV batteries degrades on average by 2.3% annually, according to an analysis by telematics company Geotab based on data from 21 BEV and PHEV models covering more than 6,300 vehicles.

The study’s key takeaway may be interpreted in a couple of ways depending on whether you put yourself in the shoes of the used EV seller or the used EV buyer. For now, lower value retention of EVs may suggest a more significant secondary market for used EVs, which would be a bonus for the buying public but perhaps less attractive to the seller. The authors did not explore the future effect of this dynamic. Still, I sense that the value retention decline will likely slow with improved EV offerings from more manufacturers, so I don’t see the potential adverse effect on EV sellers being a bit limited to larger-scale EV adoption. Further, if we consider previous work finding EVs tend to have lower maintenance costs than CVs, along with declining costs for new EVs that are generally better-performing than earlier models, I think we’ll continue to see a healthy and rapid expansion of not only new EV sales but a resultantly strong market for buyers of used EVs as well.

Insights and Implications

What have we learned today? There are several insights and implications that are relevant not only to consumers in general but also to those in corporate sustainability roles looking at various ways to decarbonize their transportation footprint.

  1. The transportation sector is a significant contributor to global GHG emissions. The peer-reviewed scientific literature is clear that the emissions profile (both in the use phase and across the whole life cycle of the vehicle) for BEV and PHEV passenger vehicles significantly outperforms HEV and CV when considering use-phase GHG emissions and life-cycle GHG emissions.

  2. A healthy resale market for EVs, which enables EVs to remain in service longer and, therefore, helps avoid the purchase or use of a new or used CV, is critical to meeting global decarbonization goals in the transportation sector. The best available evidence suggests EVs may have a useful life comparable to a CV, which is a vital part of the transition from CVs to EVs.

  3. The retained value of EVs in the secondary market is a useful proxy for understanding the health of the resale market. Generally, CVs retain their value better than BEVs and PHEVs, but the gap between EVs and CVs has narrowed recently, mainly because of improvements in battery range. Adding more battery range tends to diminish value retention at around 200 miles.

  4. In the near term, the used EV market could offer some compelling buying opportunities given its relatively rapid decline in value compared to CVs, but if current trends hold, this opportunity will decline in the future. Federal subsidies will likely continue to be depressing and affect EV value retention, but that will likewise decline as EV sales grow and subsidies run out.

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