Although Congress is preparing to approve the new tax credits for electric vehicles, with the rules are written the way they currently are, it would effectively disqualify each and every electric vehicle that’s available on the market at the moment. With the Inflation Reduction Act of 2022 being passed by the Senate, to be eligible to receive the newly expanded tax break of $7,500, it would require that batteries have at least 40 percent of their materials sourced from North America or a US trading partner by the year of 2024. Battery components should be 100% made in North America by 2029.
Since most EVs use lithium-ion batteries, and these as mainly made in China, this would disqualify any EV currently in production. China has about 76 percent of the battery market, with the US holding only 8 percent. In order to get a deal passed, Democrats had to agree to provisions requiring vehicles to use batteries made in North America. This happens because China is listed as a “foreign entity of concern” by the federal government, and minerals that “were extracted, processed, or recycled by a foreign entity of concern,” would not be eligible for the credit.
A foreign entity of concern is a country that sponsors terrorism or those blocked by the Treasury Department’s Office of Foreign Assets Control. This tough-on-China stance Democrats are running, which includes West Virginia Senator Joe Manchin and Senate Majority Leader Chuck Schumer, who negotiated the deal in secret, is under fire. Republicans, who opposed the Inflation Reduction Act, tried to make the requirements even stricter, requiring batteries to be 100 percent sourced in North America immediately, with no phase-in period, but this amendment by Senator Marco Rubio (R-FL) did not pass the Senate.
The auto industry claims that the new requirements would disqualify every electric vehicle on the market by 2029. “The $7500 credit might exist on paper, but no vehicles will qualify for this purchase incentive over the next few years,” said John Bozzella, president and CEO of the alliance. “That’s going to be a major setback to our collective target of 40-50 percent electric vehicle sales by 2030.”
Despite the efforts by companies such as Ford, General Motors, Toyota, and Stellantis to reduce manufacturing costs by building battery factories, it will still take some time for the US to be able to challenge China’s dominance in the market, as The Verge reported.
The main lobbying group of the industry, the Alliance for Automotive Innovation, says that currently there are 72 EV models available, with 70 percent of those being ineligible for the tax break after the bill passes, going up to 100 percent by 2029.
Bozzella admits that there are issues with the domestic supply chain and it needs serious investment, but it should not be at the expense of customer incentives. With a higher price than gas-powered vehicles, experts believe this tax credit is essential to improve sales until the costs of such vehicles are low enough to trigger parity with traditional engine vehicles.