Biden's EV-Sourcing Rules Leave Some Autos Eligible for Credits

The number of models eligible for incentives will decrease as a result of the Biden administration's conditions for electric car tax credits, which won't take effect until automakers and suppliers invest tens of billions of dollars more in US production.

‍

Few EVs will be eligible for up to $7,500 in credits as of April 18 as a result of the guidelines issued this Friday that clarify the Inflation Reduction Act, President Joe Biden's historic climate law. The reason is that the majority don't satisfy the new criteria that essential minerals or battery components come from North America or US free trade partners.

‍

The U.S Treasury Department's announcement was widely anticipated by the global car industry, whose lobbyists had been urging for months to relax the sourcing and content standards. Although it will be challenging to obtain the tax credits for consumers contained in the law, known as the IRA, those incentives and extra benefits for businesses have helped lead to announcements of more than $52 billion in EV and battery investment in the US.

‍

The Treasury has not yet specified how it would determine which businesses are foreign entities of concern, and as a result, automakers won't be able to source battery components and essential minerals from them in the future. Making the US less dependent on China, which controls the majority of the EV battery supply chain, is one of the main objectives of the IRA.

‍

According to a senior Treasury official who briefed reporters ahead of the announcement, the number of vehicles that would qualify for tax benefits will return as the supply chain is built up in the following years. Before the implementation of the advice, only 21 models were eligible for credits.

‍

"This recent development will significantly lower the number of qualified EVs," said John Bozzella, head of the Alliance for Automotive Innovation, in a statement, adding that it's uncertain how many will qualify next month. "This era may go down in history as the pinnacle of EV tax credit eligibility since the IRA was enacted last year."

Breaking From China

The Biden administration wants to revitalize American manufacturing while shifting the economy away from fossil fuels. The IRA also connects with a different national security goal: to remove the United States and its allies as much as possible from reliance on supply lines perceived to be susceptible to China. Products of concern, in addition to batteries, include semiconductors, medicinal compounds, and green energy components.

‍

Treasury Secretary Janet Yellen stated in a statement that the IRA is "producing American manufacturing jobs and enhancing our energy and national security."

‍

The automotive sector, with its complicated and long-distance supply networks spanning mines to battery-cell producers, has been keenly watching how forcefully Washington pursues its aims. Legacy automakers, including Ford Motor Company and EV market leader Tesla Inc., have plans to develop new battery operations in the United States that may use Chinese intellectual property.

‍

After an extensive lobbying effort since the legislation's passage in August, the Biden administration offered manufacturers significant leeway in its interpretation. While this has calmed some major automakers and trade partners, it has enraged proponents of the measure, notably West Virginia Senator Joe Manchin, who was instrumental in getting the IRA enacted.

‍

The IRA provides up to $7,500 in consumer tax benefits for autos that fulfill criteria based on their price, customer income, and location of assembly. The most extensive and contentious standards include the battery's components and materials.

‍

The rules divide the credit in half, with $3,750 available for vehicles containing at least half of their battery components from North America, and the remainder if 40% of the value of raw materials in the battery is extracted or processed domestically, or in countries with which the US has free trade agreements. These needs will gradually increase.

‍

‘Foreign Entity of Concern’

Treasury has been evasive in defining what the statute means by "foreign entities of concern," however administration officials have stated that it will cover Chinese corporations. Beginning in 2024 and 2025, no tax benefits are available for automobiles incorporating battery components or essential minerals from foreign companies of concern.

‍

Biden's strategy has a difficult road ahead in competing with China on batteries, which analysts at UBS Group AG have compared to the twenty-first-century equivalent of oil.

‍

Contemporary Amperex Technology Co., Ltd. is a Chinese battery company. Last year, Ltd. and BYD Co. accounted for slightly more than half of the market. Trade Algo predicts that by the end of the decade, China will account for nine of the top ten battery manufacturers.

‍

"China's dominance in the battery supply chain — from essential mineral processing to EV adoption — cannot be overstated," said Andrew Wang, a battery industry research organization located in London. "The implementation of the IRA will need to strike a careful balance by rewarding supply-chain decoupling without forcing a decade of scaling lessons to be relearned."

‍

With CATL and BYD investing billions in battery mineral sourcing, China's dominance over the EV supply chain has grown to roughly 90% in the production and processing of a variety of battery materials and minerals.

‍

The most challenging chokepoint to overcome in the global EV supply chain is China's control of crucial minerals processing - the procedures necessary to convert mined material into useable compounds and items. According to a survey from Washington thinks tank SAFE, China currently processes 60% to 100% of all battery minerals.

‍

The White House has recently pushed to broaden the list of countries with which the US has trade agreements that allow them to provide key minerals. It just signed an agreement with Japan and is currently negotiating with the European Union.

‍

Such key mineral agreements might benefit the few European enterprises that presently produce nickel and cobalt, while also improving the investment case for future expansions. Countries such as Finland and Japan play a significant role as suppliers to the US, and recent agreements are critical for both sides to ensure that trading partners are not locked out in the future.

‍