How the new EV tax credit rules work
The revamped EV tax credit adds increasingly stringent rules on where battery critical minerals are extracted and processed, and where battery components are made or assembled for vehicles to be eligible.
» For critical minerals: Before 2024 and after the U.S. treasury secretary issues the proposed guidance: 40% must be extracted or processed in the U.S. or in a country where the U.S. has a free-trade agreement in effect, or from materials that were recycled in North America.
» For battery components: Before 2024 and after the U.S. treasury secretary issues the proposed guidance: 50% must be made or assembled in North America.
» Final vehicle assembly must occur in North America for EVs sold after the bill is enacted.
» Starting in 2024: Vehicles are ineligible if the battery components were manufactured or assembled by a ‘foreign entity of concern,’ a term that encompasses specifically designated nations and organizations owned by, controlled by or under the jurisdiction of such nations.
» Starting in 2025: Vehicles are ineligible if the battery critical minerals were extracted, processed or recycled by a foreign entity of concern.
When will the current tax credit phase out?
The old $7,500 tax credit — with no limits on price, income or battery content — will remain in effect until the end of 2022. However, upon signing of the bill, it immediately will be modified to apply only to vehicles assembled in North America, sources who have reviewed the legislation told Automotive News.
SOURCE: Inflation Reduction Act
WASHINGTON — Automakers had hoped for an electric vehicle tax break that is available to the broadest range of vehicles and consumers as they look to spur interest and grow the mass market for EVs in the U.S.
That’s not what they’re getting.
Instead, the revamped EV tax credit provisions in the Inflation Reduction Act — the Democrats’ landmark health, climate and tax bill — could delay or block access to the credit for years, as it imposes new restrictions on where the critical minerals used in batteries are extracted or processed, where battery components are made or assembled and where final assembly of the vehicle occurs.
The $7,500 credit is parceled out in two halves for qualifying vehicles and buyers. Half is based on meeting escalating requirements for battery components to come from North America with none from China or other foreign entities of concern as soon as 2024. The other half is based on critical minerals coming from the U.S. or free-trade partners with no “entity of concern” sourcing from 2025.
Once the act is signed into law by President Joe Biden, it could take at least four years for vehicles to be eligible for the full credit, estimates Mark Wakefield, global co-leader of the automotive and industrial practice at consulting firm AlixPartners.
“And that’s not going to be a flood,” Wakefield told Automotive News. “That would be the first vehicle that would have been designed and developed and launched that’s target-optimized to come in under the price limit, to be a lower- cost vehicle, to have the battery supply chain and the other supply chains addressed.”
The House of Representatives passed the reconciliation bill with the EV tax credit on Friday, Aug. 12, following the Senate’s passage Aug. 7.
The old $7,500 tax credit — with no limits on price, income or battery content — will remain in effect until the end of 2022. However, industry experts said it immediately will be modified to apply only to vehicles assembled in North America.
Manufacturers of EVs — battery-electrics, plug-in hybrids and fuel cells — now must decide whether they’ll chase all, some or none of the new tax credit. Depending on their strategies, it could mean reshaping their supply chains sooner than anticipated to rely more on credit-friendly countries and potentially seeking alternative battery chemistries to rely less on credit-excluded ones.
“I think the sourcing is really going to be the main concern for the industry,” said Colin Langan, a Wells Fargo auto analyst. “It’s almost unworkable considering how much is already out of China and how hard it is going to be to rearrange those supply chains and how little is actually available within the U.S. and with free-trade partners.”
Most battery chemistries today are nickel-based, but only 11 percent of nickel and 6 percent of cobalt are available from the U.S. and free-trade partners, Langan said.
“Coincidentally, almost nothing is in the U.S.,” he added. “That’s a very small amount of materials that you almost certainly will need to have sourced from those small regions, so it is going to be highly competitive and difficult to get it sourced from those select countries.”
Most of the nickel and cobalt is being processed in China, particularly for NMC — or nickel, manganese, cobalt — battery chemistries that are typically used in higher-priced EVs with longer range, said Wakefield. To balance cost and sourcing hurdles, automakers may shift to LFP, or lithium iron phosphate.
“Iron and phosphate are much more stable, much more readily available,” Wakefield said.
To be sure, the two major suppliers of lithium iron phosphate are CATL and BYD — both Chinese companies. CATL has plans to supply batteries to Ford and Tesla. BYD reportedly plans to supply Tesla in Germany.
“Some of the cost advantage of LFP could be diluted if those batteries are not qualified because the chemistries are owned by Chinese entities,” Langan said. CATL, for example, has considered building a battery plant in North America.
Simon Moores, CEO of Benchmark Mineral Intelligence, said he doesn’t think it’s feasible for automakers to meet the increasingly stringent critical mineral and battery component sourcing requirements before 2025.
It also could be challenging for countries with free-trade agreements with the U.S. to “fill the medium-term gap” for raw materials.
“I think we start seeing an impact post-2026, but this requires investment to flow into new lithium, nickel, cobalt, graphite and manganese mines in the [U.S.] now,” said Moores, noting that it can take up to 10 years to build a mine and refining plant but only two years to build a battery plant.
Moores, too, was less than optimistic about reducing U.S. reliance on China, which dominates the processing and refining of key battery minerals. If the U.S. wants to build EVs, “it needs China,” he said. “There is no way around this even in the medium term.”
The Alliance for Automotive Innovation, which represents most major automakers in the U.S., this month expressed concern that the tax credit’s rules, as written, could significantly curtail eligibility.
Of the 72 EV models available for purchase in the U.S., 70 percent — or about 50 models — “would immediately become ineligible … and none would qualify for the full credit when additional sourcing requirements go into effect,” John Bozzella, the alliance’s CEO, wrote in a blog post.
Automakers had unsuccessfully pressed lawmakers for changes, such as a more gradual phase-in of the battery component, material and assembly requirements and expanding the list of eligible countries.
“This is not just flipping a switch,” said Loren McDonald, CEO of analysis and consulting firm EVAdoption.
“The most obvious near-term implication is that the automakers will have to allocate significant resources and investment to completely reshape their battery supply chains,” he said.
But with the tax credit expiring at the end of 2032, coupled with eligibility challenges, “it becomes highly questionable whether automakers still feel motivated to try to chase these targets,” Langan said.
“The last thing automakers want to do is put a lot of capacity in place and then not sell cars,” he added.
Katherine Stainken, vice president of policy for the Electrification Coalition, said the tougher tax credit, while incredibly challenging, isn’t as “doomsaying” for the EV market as some predict. Automakers could have until the end of December to help shape the U.S. Treasury Department’s proposed guidance, she noted.
“Worst-case scenario, it takes automakers five years to comply [starting in 2023] and that takes us to 2028. We still have four years of an uncapped tax credit,” Stainken said. “We have to take our thorns with the roses, I guess.”