The Biden administration published new rules on Friday that will significantly shorten the list of electric vehicles that qualify for federal tax credits. Officials hope the change will prompt automakers to move their supply chains out of China to the United States or its allies.
The rules, issued by the Treasury Department, are the result of the Cut 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 seeks to reduce the industry’s dependence on China, which makes most of the world’s batteries and dominates the processing of critical raw materials.
For your electric car purchases to qualify for up to $7,500 in tax credits, automakers must meet strict requirements about where they assemble the cars and batteries and where they source the materials used to make the batteries. Only a handful of vehicles are expected to qualify for the full credit when the rules, which are stricter than previous requirements, go into effect on April 18, up from 21 currently.
The new rules, which could be revised in response to public comment, will require that a certain percentage of the components and minerals in each electric car’s battery come from domestic sources or countries with which the United States has trade agreements.
The full list of qualifying cars won’t be released for a couple of weeks, but Tesla began letting buyers know the changes would affect its lineup. The company said on its website that the least expensive version of its Model 3 sedan, one of the most popular electric cars, would no longer be eligible for the full credit. The car uses a battery made in China.
General Motors said Friday that three electric vehicles it plans to sell this year — the Cadillac Lyriq and electric versions of the Chevrolet Equinox and Blazer sport utility vehicles — would qualify for the full credit.
James M. Wickett, a partner at Hogan Lovells who focuses on tax and energy policy, said the EV tax credit was “moving supply chains, to the tune of tens of billions.”
“Details matter significantly,” he added.
A significant detail on Friday expanded the program to include battery minerals from Japan and paved the way for adding more countries, such as the 27-member European Union.
Officials in the United States, Europe and elsewhere have also begun discussing plans to build a sort of club of buyers of critical minerals that could put pressure on the global industry, including setting higher labor and environmental standards for mining, processing and manufacturing.
The race is on for manufacturers whose vehicles do not qualify for US tax credits to purchase the minerals and components that qualify. The credit gives a significant competitive advantage to any car that meets the qualification.
To be eligible, at least 50 percent of the components in an electric car battery must be made in North America. And 40 percent of the minerals used to make the batteries, which often contain nickel, manganese and cobalt, must come from domestic sources or from countries that have trade agreements with the United States. The mineral share will increase each year until it reaches 80% in 2027, and the component share will rise to 100% in 2029.
The administration said it would then issue rules clarifying how much investment companies from countries like China and Russia could receive and still qualify for tax credits. The law includes prohibitions on the use of critical minerals and battery components from a “foreign entity of interest,” a term that includes companies based in China, Russia, North Korea and Iran.
Siyu Huang, chief executive of Factorial Energy, a Massachusetts company that is developing advanced batteries with backing from Mercedes-Benz, Hyundai and Stellantis, welcomed the trade deal with Japan. But he said it would be “very challenging” to procure battery-grade lithium because almost all the refineries are in China.
“The critical part of this is really where the lithium comes from,” Ms. Huang said.
In writing the rules, Biden officials have tried to balance two priorities: encouraging Americans to buy cleaner cars to mitigate climate change and trying to bring more auto, battery, and battery-material factories to the United States and its allies.
Company executives and some analysts said management had favored the latter goal. Given the limited number of vehicles that currently qualify for tax credits, some consumers might decide to wait to buy an electric car until more become eligible in a few years, said William Reinsch, Scholl President of International Business at the Center for Strategic and International Business. . Studies, a Washington think tank.
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“What always happens if people aren’t sure is they hold on to their wallets,” Reinsch said.
Jennifer Safavian, chief executive of Autos Drive America, which represents foreign automakers such as Toyota, Honda and Volkswagen, welcomed Japan’s inclusion, saying it would help strengthen supply chains. However, she added, the drop in the number of eligible cars would slow the growth of electric cars.
But some lawmakers complain that the Biden administration has been too generous to foreign companies. Senator Joe Manchin III of West Virginia, a key player in the writing and passage of the Inflation Reduction Act, said this week that he may file a court case challenging the administration’s interpretation of the law.
In a statement Friday, Mr. Manchin said the Treasury Department’s guidance “completely ignores the intent” of the law.
“It is appalling that the administration continues to ignore the purpose of the law, which is to bring manufacturing back to the United States and ensure that we have reliable and secure supply chains,” he said. “American tax money should not be used to support manufacturing jobs abroad.”
The legislation has already shaken the auto industry. Immediately after President Biden signed the bill into law in August, a provision excluded any electric vehicle not made in the United States, Mexico or Canada from tax credits.
Hyundai and Kia cars made in South Korea no longer qualified, angering that nation’s leaders, who felt betrayed by a close military and business partner. Since then, sales of electric vehicles made in South Korea have lost market share in the United States.
The law also turned out to be a major source of diplomatic friction. Leaders of the European Union, Japan and other US allies feared the program would lure investment from their countries or force them to offer more generous subsidies to compete with the United States.
Because the European Union, Japan and Great Britain do not have free trade agreements with the United States, products from those countries, including battery materials, did not qualify for any part of the tax credits.
Under pressure from foreign governments, the Biden administration proposed an alternative solution. In a press release, the Treasury Department said the law did not define the term “free trade agreement,” which “could include newly negotiated critical mineral 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 heavily criticized by lawmakers in Congress, who have said the administration failed to consult with them on trade policy, or argued that US taxpayer money will now subsidize Japanese industry.
For consumers, the new rules are likely to make many electric vehicles more expensive.
At least some Tesla vehicles will likely remain eligible. The company makes cars in California and Texas and batteries in Nevada. Ford Motor said it would reveal “soon” whether any of its vehicles qualify.
Car manufacturers will need to certify whether their vehicles meet component and mineral requirements. The Internal Revenue Service will enforce the rules. Some vehicles may qualify for only half the credit if, for example, they meet the component quotas but not the mineral quotas.
The list of eligible cars is expected to grow as it becomes easier for companies to purchase processed lithium and other materials from US trading partners such as Canada and Australia. Many companies are developing mines and building refineries. More cars will also qualify once Hyundai, Ford, Honda and other automakers finish building new car and battery plants in the United States.
And a loophole in the law allows companies to collect the credits if they lease vehicles to customers, even if the cars don’t meet sourcing and manufacturing requirements. Automakers and their dealers could pass those credits on to consumers by lowering monthly lease payments.
alan rapport contributed reporting.
