These rules, outlined by the Treasury and Energy departments, aim to limit EV buyers from claiming the full tax credit if they purchase cars containing battery materials from countries considered hostile to the United States, such as China. The proposed rules, which are expected to become final in January following a 30-day public comment period, come as President Joe Biden strives to achieve his goal of having half of all new passenger vehicles sold in the U.S. run on electricity by 2030.
The introduction of these rules is likely to impede consumer acceptance of electric vehicles at a time when the Biden administration is pushing for increased sales to help reduce greenhouse gas emissions. While EV sales have tripled since Biden took office, the United States still heavily relies on foreign sources, particularly China, for critical minerals needed to produce EV batteries.
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The specific vehicles that would be eligible for the full $7,500 tax credit under the new rules have not yet been disclosed by the government. However, the Inflation Reduction Act, passed by Congress, includes language that prohibits electric cars from qualifying for the full tax break if critical minerals or other battery components are made by a "foreign entity of concern." This definition encompasses companies owned by, controlled by, or subject to the jurisdiction of North Korea, China, Russia, or Iran, with China being the primary target.
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Administration officials have stated that the auto industry has been aware of these impending rules for some time and has taken steps to develop domestic auto-supply chains and reduce dependence on China. The White House hopes that these new tax-credit rules will incentivize the development of auto-supply chains within the United States. Deputy Treasury Secretary Wally Adeyemo emphasized that automakers have already made adjustments to their supply chains to ensure eligible buyers can still claim the tax credits. He also acknowledged that these changes take time but expressed confidence in the industry's investments in American consumers.
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In response to the climate law, car manufacturers like General Motors and Hyundai are racing to establish factories in the United States for battery production and the processing of materials like lithium. However, these companies are still several years away from being able to produce an electric vehicle without relying on materials and components from China.
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The new rules are intended to provide clarity after months of uncertainty regarding how strictly the administration would interpret regulations concerning foreign entities of concern. Deputy Energy Secretary David Turk emphasized the importance of clarity for manufacturers as they make significant investments in EVs, which are crucial for the future growth of the industry.
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While it remains uncertain how many cars currently eligible for tax credits will lose some or all of the credit next year, Adeyemo stated that the auto companies themselves will determine which vehicles qualify based on their actions. Mobility analyst Sam Abuelsamid predicts that many EVs currently eligible for the full $7,500 tax credit will see that amount reduced by half next year when the new regulations take effect.
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Abuelsamid believes that automakers can likely comply with the requirement that 60% of battery parts come from North America next year to qualify for a $3,750 tax credit. However, meeting the requirement of sourcing half of the critical minerals from the U.S. or countries with free trade agreements will be much more challenging, potentially resulting in a loss of $3,750 in tax credit.
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Starting in 2024, an eligible clean vehicle must not contain any battery components manufactured by a foreign entity of concern, according to the Treasury. Additionally, beginning in 2025, a clean vehicle must not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern to qualify for a tax credit. As a result, analysts anticipate that 2024 and 2025 will be challenging years for automakers to meet the battery content requirements.
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To ensure that credits can continue while the rulemaking process progresses, the proposed rules include a transition period for EVs placed in service after January 1. Additionally, a new rule allowing tax credits to be applied at the time of sale, rather than waiting until tax returns are filed, may offset potential issues caused by smaller tax credits and high interest rates. This change would reduce monthly payments for consumers, addressing a major obstacle to EV adoption.
Customers also have the option to lease an EV and receive the full tax credit since these vehicles are classified as commercial vehicles exempt from the North America manufacturing and battery-content requirements.
Prior to the announcement of the new rules, Democratic Senator Joe Manchin urged the Treasury to adopt the strictest possible standards to prevent Chinese-produced minerals or Chinese battery companies from receiving electric vehicle tax credits. Manchin, who chairs the Senate Energy and Natural Resources Committee, played a key role in the provision that bars the full tax credit if battery components are manufactured or assembled by a foreign entity of concern, particularly China.
The complexity of the rules is exemplified by the controversy surrounding Ford Motor Co.'s plans to build a factory in Michigan for battery production. While Ford claims that a wholly owned subsidiary would own the factory and employ the workers, China's Contemporary Amperex Technology Co. Limited (CATL) would supply technology, equipment, and workers. It remains unclear whether batteries from the Ford plant would qualify for tax credits.
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