WASHINGTON — As the Biden administration works to strike a balance between two objectives — accelerating electric vehicle adoption and securing a domestic supply chain — forthcoming guidance that further constricts battery material and component sourcing rules could tip the scale.
The U.S. Treasury Department last month released its much-anticipated proposed guidance on battery sourcing rules in the Inflation Reduction Act’s consumer tax credit for new EVs, known as 30D. The rules are designed to incentivize domestic production and reduce reliance on foreign supply chains.
When those requirements take effect April 18, fewer EVs are expected to qualify for the full $7,500 credit, potentially triggering a short-term slowdown in new EV sales as automakers and consumers untangle the complex eligibility restrictions, industry experts told Automotive News.
Adding to that: Treasury still needs to release guidance on how strictly it will enforce the law’s “foreign entity of concern” provision, which blocks tax credits for vehicles containing any battery components or critical minerals from producers controlled by countries such as China starting in 2024 and 2025, respectively.
The answer will be vital to automakers such as Ford Motor Co., which has a licensing agreement with China’s Contemporary Amperex Technology Co., to leverage its technology at a planned $3.5 billion battery plant in Michigan. Tesla is exploring a similar arrangement with CATL, according to a Bloomberg report.
“This piece of legislation has always had this conflict between: Is the purpose of the bill to drive EV sales, or is it to change supply chains and essentially get stuff out of countries like China?” said Dan Ryan, vice president of government and public affairs at Mazda North American Operations, which does not sell any EVs that qualify for the credit.
“You could certainly argue that the bigger priority of the bill itself is to bring supply chains and production to the U.S. and North America. … The big question, to me, is how big of an impact are these incentives going to have on consumer behavior?” he added.
Under the Inflation Reduction Act, buyers who meet certain income thresholds can get a tax credit of up to $7,500 for North American-assembled new EVs that also meet sticker price restrictions.
Starting April 18, the credit will be split in two, with $3,750 for EVs that have at least 40 percent of the value of the battery’s critical minerals extracted or processed in the U.S. or in a country where the U.S. has a free-trade agreement, or from materials that were recycled in North America. Another $3,750 is available if at least half of the value of the EV’s battery components are made or assembled in North America.
Those percentages ramp up over time, maxing out at 80 percent in 2027 for minerals and 100 percent in 2029 for battery components.
An updated list of eligible vehicles, including the amount of the available credit, is expected to be available April 18 at fueleconomy.gov. Automakers will report monthly to the IRS — under penalty of perjury — on which vehicles qualify.
The increasingly stringent rules are expected to slash the number of EVs eligible for the full $7,500 credit in the short term, encouraging automakers and other companies to bring supply chains and manufacturing to the U.S., a senior Treasury official told reporters in March.
“However, we believe these requirements will significantly increase the number of vehicles made and sold in the U.S. over the next decade as new investments and American production come online,” the official said.
Beyond the tougher eligibility hurdle, several industry experts said Treasury’s proposed guidance on the tax credit largely parallels interim guidance put out in December. As Mazda’s Ryan put it: “I didn’t see any big surprises in it or change in approach.”
The guidance, which is not final and is subject to a public comment period through June 16, instead provided more specificity — and some leniency — on determining when critical mineral processing ends and battery component manufacturing begins, and which countries have free-trade agreements with the U.S.
“With that clarity, it’s a huge step into the right direction,” said Pablo Di Si, CEO of Volkswagen Group of America. “Each company can decide: Am I going to invest here?”
As of Wednesday, April 5, the German automaker was still assessing with its EV supply chain partners whether the 2023 ID4 — made at its Chattanooga Assembly Plant — will qualify for a credit after April 17.
Other automakers such as Nissan also said they were reviewing the guidance and determining any changes to eligibility.
So far, just three automakers — Ford, General Motors and Stellantis — said they’ll have EVs that will qualify for the full $7,500 credit when the EV battery sourcing rules take effect this month.
Still, Di Si said he expects the U.S. will be “transformed in the next five years” as more EV and battery manufacturing investments flood into the country.
“If you look at the big picture, the U.S., I believe, is setting the tone on having these policies that will transform a country,” said Di Si, who is the 2023 chairman of Autos Drive America, a trade association that represents VW and 11 other international automakers with U.S. operations.
In the meantime, Treasury gave automakers some leeway in meeting the EV battery sourcing rules by treating anode and cathode active materials as processed critical minerals — or “constituent materials” — rather than as battery components, enabling those materials to be sourced outside North America and with free-trade partners.
“That’s one of the few levers that Treasury has right now to dial back or ramp up the stringency,” said Thomas Boylan, regulatory director at the Zero Emission Transportation Association, a group whose members include EV-only brands such as Lucid Motors, Rivian and Tesla.
The distinction for where the line was drawn between critical mineral processing and battery component manufacturing was a high priority for the auto industry, including Autos Drive America.
“We don’t have it here in the U.S. or North America yet. It’s being built out,” said Jennifer Safavian, the group’s CEO. “It’s happening, but it’s going to take some time, so this allowed automakers to have just other pathways, more options, to potentially qualify.”
Another potential ease to the tax credit’s sourcing rules? Treasury’s criteria for determining which countries have free-trade agreements with the U.S., including its decision to allow newly negotiated trade deals on critical minerals to qualify.
“It is so important that we have the ability to work with our closest allies on getting these critical minerals that we need to produce these vehicles,” said Safavian, pointing to the recent U.S.-Japan trade deal on critical minerals and a similar one being negotiated with the European Union.
Even so, how Treasury decides to define and enforce the law’s foreign entity of concern provision “will make or break the national security benefits,” said Robbie Diamond, CEO of SAFE, a Washington-based energy security organization.
How strictly Treasury decides to implement the provision also could be a “red light” to broader vehicle eligibility, said Boylan, noting that the department might choose to lean on a proposed definition in the CHIPS and Science Act.
Under that definition, a foreign entity of concern could include any person or company “who directly or indirectly through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests” of a partnership, corporation or foreign political party, among other examples.
“How much exposure is concerning to Treasury?” Boylan asked.
While that’s still being determined, some analysts are predicting more EV sales leading up to the stringent sourcing rules taking effect.
“Very short term, I think that we’ll see a little bit of a rush ahead of April 18,” said Ben Kallo, senior research analyst at Baird. “Longer term, this is going to be a boost to the overall industry.”
Others, including Alvarez & Marsal’s Brian Irwin, aren’t as optimistic.
“The number of vehicles qualifying will drop on the 18th from where we are today,” said Irwin, who leads the consulting firm’s automotive sector team.
“The more pragmatic question,” he said, “is how is that helpful to drive EV adoption?”
