Electric vehicles are experiencing significant depreciation rates. For instance, a Tesla Model 3 will lose 45 percent of its value after three years, whereas a gas-powered Toyota RAV4 will depreciate by just 22 percent over the same period. After only one year, the resale value of a Tesla Model 3 is roughly 64.38 percent of its original price. Recent figures from CarEdge suggest that Teslas can depreciate at twice the rate of gas-powered cars. The Tesla Model Y, Model S, and Model X are projected to depreciate by 57 percent after five years, in contrast to the 28 percent depreciation expected for the RAV4. Tesla is facing a potential saturation point where the abundance of Teslas on the road may reduce their appeal, similar to what occurred with the Toyota Camry in the 1990s.
In 2021, Hertz announced plans to purchase 100,000 electric vehicles from Tesla, but the company encountered disappointing rental demand and higher-than-anticipated costs. By January, Hertz decided to sell off 20,000 of these vehicles, with prices dropping to as low as $25,000. The depreciation of these vehicles resulted in a $588 million loss for Hertz in the first quarter of this year compared to the last quarter of 2023. This “EV nightmare” also led to the CEO’s dismissal.
A recent survey by McKinsey & Company revealed that globally, 30 percent of electric vehicle owners are likely to switch back to gas-powered vehicles for their next purchase. The main dissatisfaction among EV owners is inadequate public charging infrastructure, a problem expected to worsen. The Energy Policy Research Foundation (EPRINC) found that the U.S. will need to significantly expand its charging network to meet the anticipated demand for the electric vehicles required under the Biden-Harris Corporate Average Fuel Economy (CAFE) standards. The National Highway Traffic Safety Administration’s (NHTSA) CAFE standards, finalized in June, and the Environmental Protection Agency’s tailpipe standards, finalized in March, are pushing automakers to produce electric vehicles that result in significant financial losses.
The CAFE standards are based on a production-weighted average of mileage ratings across a manufacturer’s fleet, meaning compliance is based on the range of models an automaker produces. EPRINC research indicates that current popular vehicle models will far exceed the 2032 emission limits set by the Biden-Harris standards. For instance, the Toyota Camry, Nissan Rogue, and Toyota RAV4—two SUVs and a sedan—emit more than twice the amount of pollutants allowed by the 2032 regulations.
To meet these standards, automakers must transition a significant portion of their production to electric vehicles. Hybrids, which combine electric and gas-powered components, may help meet the standards, and many manufacturers are preparing to rely on them. A fleet of entirely gas-powered vehicles would need to be fully hybrid to comply with the Biden-Harris standards.
Automakers that fail to meet these standards hundreds of millions of dollars in fines. Many automakers are struggling with the financial losses from their EV lines, relying on profits from gas-powered vehicles to stay profitable. For example, Ford lost $132,000 on each electric vehicle sold in the first quarter of this year but reported a net income of $1.3 billion due to revenues from its gas-powered and hybrid vehicles. This means that consumers buying non-EVs are essentially subsidizing the losses incurred by government mandates.
EV owners are also facing greater financial strain when trading in their vehicles. According to Edmunds, 23.9 percent of new vehicle sales with a trade-in had negative equity, the highest rate recorded since early 2021. The average amount of negative equity, or “upside-down” loans, rose to a record $6,255 in the second quarter of 2024, up from $4,487 in the second quarter of 2022. For EV owners, negative equity reached $10,326 in the second quarter of this year, nearly double the $5,469 recorded in the same period in 2022. Over the last few years, inflated vehicle trade-in values kept consumers somewhat shielded from falling underwater on their car loans. As trade-in values normalize and the market adjusts, EV owners are increasingly feeling the financial impact, with some vehicle types more affected than others.
European Auto Markets
In Europe, the plummeting resale values of electric cars have led leasing companies, which are central to Europe’s auto market, to double their prices over the past three years. Some firms are even considering exiting the market if regulations push them to transition to electric vehicles too quickly. Lease prices are set to cover the vehicle’s depreciation over the typical three-year lease term, based on projected resale values. When actual resale prices turn out to be lower than expected, leasing companies face financial losses when they retrieve the vehicle.
Leasing plays a crucial role in Europe, with 60 percent of all new cars, regardless of fuel type, being leased. For electric vehicles, this figure can be as high as 80 percent. In the 16 European markets where fleet registrations are tracked—such as Germany, Britain, France, and Spain—60 percent of new electric vehicles are acquired by corporate fleets and commercial buyers. These buyers predominantly use leases, and approximately half of the remaining sales to private individuals are also through leasing.
Several factors, including price reductions by Tesla, worries about charging infrastructure and battery lifespan, and the arrival of more budget-friendly Chinese electric vehicles, have caused second-hand electric car prices in Europe to decline since peaking in October 2022. As of early July, resale values for electric cars in Germany were 24 percent below pre-pandemic levels, while in Britain they were 30 percent lower. In contrast, used gasoline-powered cars in both markets have remained about 15 percent more expensive.
Conclusion
Depreciation is hitting the market for electric vehicles hard as prices for used electric vehicles are depreciating much faster than those for gas-powered vehicles—in some cases as much as double—as the novelty of electric vehicles is wearing off and drivers are accustomed to seeing them on U.S. and European roads. That does not bode well for U.S. automakers that are being forced to meet the Biden-Harris CAFE standards, which require more and more electrics to be manufactured and sold over time to avoid large fines. In Europe, electric vehicles are mainly leased, and the low EV resale prices have forced companies to double prices on the electric vehicles they lease. The jump in prices for EV leased cars comes as cuts in subsidies for new electric vehicles in key markets such as Germany are hitting sales and risks stalling Europe’s electric transition. Depreciation of electric vehicles may also affect the Biden-Harris administration’s plan for an energy transition.
