US tax credit for electric cars has strings attached

A tax credit for electric vehicles wrapped into landmark US climate legislation comes with an asterisk: later this decade, there will be years when not a single car qualifies for the $7,500 subsidy.

The looming hiatus for the tax credit may make EVs less affordable — at least temporarily — as the Biden administration aims to wean Americans off internal combustion engines. It reflects an effort to advance lower-carbon transport while also nurturing domestic manufacturing of battery cars.

The law signed by president Joe Biden last week immediately requires that any EV sold in the US must be assembled in North America to qualify for the credit. The requirements grow stricter in 2024, when eligible EVs must have battery components not made or assembled “by a foreign entity of concern”, which includes China, the dominant battery producer.

In 2025 those batteries must exclude “critical minerals” extracted, processed or recycled from the same foreign countries. An increasing share would need to be from North America or selected trade partners.

Under the North American final assembly rule, the administration published a list of 21 models eligible for credits for the remainder of 2022. According to the Alliance for Automotive Innovation, a manufacturer group, 72 EVs are available for sale in the US. 

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The impending limits on battery components and minerals will further shorten the list. “If the Treasury Department interprets the law, strictly as written, that would actually in my view disqualify all vehicles,” said Jay Turner, a professor of environmental studies at Wellesley College who researches the role of batteries in the clean energy transition.

A Treasury official said that changes to the tax credit will strengthen US clean energy supply chains and the country’s energy security, adding that the department expects a range of credit-eligible vehicles to be available beginning in 2023, including when the battery-related provisions take effect in 2024 and 2025.

No one predicts that the US EV market will stop short in the face of the new domestic manufacturing requirements. The US auto industry largely endorsed the new law, known formally as the Inflation Reduction Act. Ford, which has announced $14bn in US investment in EVs and batteries, was among the supporters.

“While its consumer tax credit targets for electric vehicles are not all achievable overnight, the bill is an important step forward to meet our shared national climate goals and help strengthen American manufacturing jobs,” the Michigan-based carmaker said.

One reason is because EV sales have continued to grow even under the previous tax credit system, in which incentives halted once a manufacturer sold more than 200,000 electric vehicles, as happened to industry leader Tesla in 2018. Further, that 200,000-vehicle cap will be eliminated at the start of 2023.

US EV sales grew from 319,554 in 2019 to 656,845 in 2021 and are forecast to climb to over 1.2mn in 2022, according to BloombergNEF, a clean-energy research group.

“Many EV buyers today are buying [them] knowing that they are not likely to get a federal tax rebate” because of the sales caps, said Seth Goldstein, an analyst at Morningstar.

The law extends the EV tax credits to 2032. By then, 30 to 50 per cent of EVs could qualify, said BloombergNEF analyst Colin McKerracher, who said the law will provide “a significant boost” for the US EV market.

Bernard Swiecki, research director at the Center for Automotive Research, said that the law is a net positive for the transition to US electric vehicles. However, Swiecki said that some consumers are at risk of being priced out of the market if the tax credit is unavailable for the cars they want to buy.

“My big question mark is: will the automakers who produce vehicles that don’t qualify drop prices to at least partially offset [the absence of a tax credit]?” he asked. Swiecki noted that Tesla and General Motors lowered prices once their sales reached the 200,000-vehicle cap.

The impending restrictions on the origin of battery components and minerals loom large over the US industry.

China refines 73 per cent of the world’s cobalt, 68 per cent of its nickel, 59 per cent of its lithium and 40 per cent of its copper, making it the “dominant global player in refining strategic minerals”, according to a Brookings Institution report.

China also makes most of the world’s mineral-rich battery cell components, including 70 per cent of cathodes, which boost the amount of power a battery can deliver. The nation’s dominance in mineral refining and battery manufacturing means that it plays a role in the production of every EV currently sold in the US, experts said.

Senator Joe Manchin, a Democrat whose support was critical to the bill’s passage, had been outspoken against supply chains based in China. “I’m going to do everything I can to stop it because I think it’s stupid, because we are not able to protect our investments in the country,” he said in June.

Manchin’s “staff got carried away with the [manufacturing] goals they were trying to set” instead establishing ones that “will be too hard to meet” in the timeline set out by the act, said Dennis Blair, a former director of national intelligence under US president Barack Obama who now chairs Safe, an energy security organisation.

Having more expensive EVs would mean “less energy security for the country” in the short term, Blair said.

Though the Alliance for Automotive Innovation reported that automakers have invested over $100bn for EV production expansion in the US, “there’s no way the supply chain is going to reach us” over the next two years, said Mike Ramsey, an analyst at Gartner.

But he and other analysts do not believe the US EV rollout will be hindered by restrictions on the tax credit, mostly because consumers have shown they are willing to shell out money for EVs.

That Tesla was able to gain such a large market share “without access to the tax credit really tells you that making vehicles that consumers actually want to buy is still more important than making vehicles that qualify for the tax credit”, McKerracher said.