New rules will make many electric cars ineligible for tax credits
The Biden administration issued new rules on Friday that will significantly shorten the list of electric vehicles eligible for the federal tax credit. Officials hope the change will push automakers to shift their supply chains from China to the United States or its allies.
The rules issued by the Treasury Department are the result of the Lower Inflation Act, which Democrats passed last year to combat climate change by encouraging the use of zero-emission vehicles and green energy. The law also aims to reduce the industry’s reliance on China, which makes most of the world’s batteries and dominates processing of key raw materials.
In order for people who buy electric vehicles to qualify for a tax credit of up to $7,500, automakers must meet strict requirements on where the car and battery are assembled and where the battery materials come from. Only a handful of vehicles were expected to qualify for the full credit when the stricter rules than previous requirements went into effect on April 18, and now on the 21st.
The new rules, which may be revised based on public comments, will require a certain percentage of components and minerals in each electric vehicle battery to come from domestic sources or countries with which the United States has a trade agreement.
The full list of eligible cars will be announced in a few weeks, but Tesla has begun notifying buyers of the changes that will affect its lineup. The company said on its website that its cheapest Model 3 sedan, one of the most popular electric vehicles, will no longer be eligible for the full credit. The car uses batteries made in China.
James M. Wickett, a partner at Hogan Lovells who focuses on taxation and energy policy, said the electric vehicle tax credit is “driving supply chains worth tens of billions of dollars”.
“Details are very important,” he added.
An important detail on Friday expanded the scheme to include battery minerals from Japan and paves the way for more countries to be added, such as the 27 members of the European Union.
Officials in the United States, Europe and elsewhere have also begun discussing plans to create a buyer’s club of key minerals that could put pressure on the global industry, including higher labor and environmental standards for mining, processing and manufacturing.
Manufacturers of cars that don’t qualify for the U.S. tax credit are racing to source minerals and components that do. This point provides a significant competitive advantage to any car that achieves this rating.
To qualify, at least 50 percent of the components in an EV battery must be manufactured in North America. Up to 40 percent of the minerals used to make batteries—often containing nickel, manganese and cobalt—must come from domestic sources or from countries with which the United States has a trade agreement. The mineral quota will increase year by year, reaching 80% by 2027, and the ingredient quota will climb to 100% in 2029.
The government said it would later issue rules on how much investment companies can receive from countries such as China and Russia and still qualify for tax credits.The law includes a ban on the use of critical minerals and battery components from “entities of foreign concern,” a term include The company is located in China, Russia, North Korea and Iran.
Siyu Huang, chief executive of Factorial Energy, a Massachusetts company developing advanced batteries with backing from Mercedes-Benz, Hyundai and Stellantis, welcomed the trade deal with Japan. But she said getting battery-grade lithium would be “very challenging” because almost all refineries are in China.
“The key part of this is really about where the lithium comes from,” Ms Huang said.
In crafting the rules, Biden officials are trying to balance two priorities: Encouraging Americans to buy cleaner cars to mitigate climate change and trying to bring more cars, batteries and battery material factories to the United States and its allies.
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Company executives and some analysts say the government is already on the side of the latter goal. Given the limited number of vehicles currently eligible for the tax credit, some consumers may decide to wait until a few years later when more eligible vehicles become available to purchase EVs, said William Reinsch, chair of Scholl’s Department of International Commerce at the Center for Strategic and International Research, a Washington think tank.
“If people are unsure, they will always hold onto their wallets,” Mr Reinsch said.
Jennifer Safavian, chief executive of Autos Drive America, which represents foreign automakers including Toyota, Honda and Volkswagen, welcomed Japan’s addition and said it would help strengthen the supply chain. However, she added that the decline in the number of eligible vehicles will slow the growth of electric vehicles.
But some lawmakers have complained that the Biden administration has been too generous with foreign companies. Senator Joe Manchin III of West Virginia, a key figure in the drafting and passage of the Lower Inflation Act, said this week that he may file a lawsuit challenging the administration’s interpretation of the law.
Manchin said in a statement Friday that the Treasury Department’s guidance “completely disregards” the intent of the bill.
“It is appalling that the administration continues to ignore the purpose of the law, which is designed to bring manufacturing back to the United States and ensure we have a reliable and secure supply chain,” he said. “U.S. taxpayer dollars should not be used to support manufacturing jobs overseas.”
The legislation has already shaken up the auto industry. Immediately after President Biden signed the bill in August, there was a provision excluding electric vehicles not made in the U.S., Mexico or Canada from the tax credit.
Hyundai and Kia vehicles made in South Korea are no longer eligible, angering the country’s leaders who feel betrayed by close military and trade partners. Sales of South Korean-made EVs have since lost market share in the United States.
The law has also proven to be a major source of diplomatic friction. Leaders of the European Union, Japan and other U.S. allies fear the plan will lure investment out of their countries or force them to offer more generous subsidies to compete with the U.S.
Since the EU, Japan and the UK do not have free trade agreements with the US, products from these countries, including battery materials, are not eligible for any part of the tax credit.
Under pressure from foreign governments, the Biden administration has come up with a workaround. The U.S. Treasury Department said in a release that the law does not define the term “free trade agreement,” which “may include newly negotiated key minerals agreements.” The Biden administration signed a limited trade deal with Japan on Tuesday covering critical minerals and is negotiating a similar deal with the European Union.
But the strategy has been sharply criticized by lawmakers in Congress, who say the administration has failed to consult with them on trade policy or argue that U.S. taxpayer money will now subsidize Japanese industry.
For consumers, the new rules could make many electric vehicles more expensive.
At least some Tesla vehicles may still be eligible. The company makes cars in California and Texas and batteries in Nevada. General Motors may also qualify soon, as it has begun battery production in Ohio in a joint venture with LG Energy Solution. Ford said it will disclose “soon” whether any of its vehicles are eligible.
Automakers must certify that their vehicles comply with component and mineral requirements. The IRS will enforce these rules. Some vehicles may only have half credits, for example, if they meet the component quota but not the mineral quota.
The list of eligible cars is expected to grow as companies make it easier for companies to buy processed lithium and other materials from U.S. trading partners such as Canada and Australia. Many companies are developing mines and building refineries. More vehicles will also be eligible once Hyundai, Ford, Honda and other automakers complete construction of new vehicles and battery factories in the United States.
A loophole in the law allows companies to collect credits when they lease vehicles from customers, even if the cars don’t meet procurement and manufacturing requirements. Automakers and their dealers can pass these credits on to consumers by reducing monthly lease payments.
Alan Rapport Contribution report.