In the latest development of the drawn out and sometimes contentious administrative machinations over federal electric vehicle (EV) incentives, the Treasury Department has today finally issued new proposed rules on which vehicle batteries will qualify for subsidies.
The Inflation Reduction Act introduced a thicket of EV tax credit regulations last summer, and the Treasury Department is in the process of clarifying the intent of the law and promulgating it as tax code rules, with far-reaching consequences on the fate of the U.S. EV transition, global mining and mineral processing supply chains, and the pocketbooks of ordinary Americans. That is, if the caveats and cross purposes embedded into the rules don’t trip up the government’s EV push on its own shoelaces. And if consumers and car makers are actually able to make sense of them.
The federal government’s position on electric vehicles was once pretty straightforward. Gasoline cars had ruled the road for generations, but their emissions were contributing substantially to climate change (transport is the largest contributor of emissions in the U.S.), and causing long term health issues for people living near highways and in smog-choked cities. EVs were an answer, but it would be hard for manufacturers of those new vehicles to compete against legacy automakers, so the government gave them a leg up with a $7,500 tax rebate that EV buyers could recoup on their next filing.
But things got more complicated when the Inflation Reduction Act was passed last August. The $7,500 tax incentive featured again in Democrats’ landmark climate law, but with significant caveats. The federal government wanted more EVs, but they also wanted the law to be fair to middle class Americans, so they added a stipulation that buyers must make less than $150,000, or $300,000 for married couples, in order to qualify for the credit. EVs themselves also had to cost less than $55,000, or $80,000 for trucks or SUVs. Congress wanted American workers to benefit, so they stipulated that eligible EVs had to be assembled in North America. And they wanted to wrench control of battery supply chains away from China, which had invested heavily in them in recent decades, so policymakers added a rule that at least 40% of the critical minerals used in making the vehicle battery must have been mined or processed in the U.S., or a country with a free trade agreement with the U.S., in order to scoop up half the tax credit. To snag the rest of the tax credit, half of the battery components must also be manufactured or assembled in North America. These are the baseline targets; the required percentages of minerals and battery components will ratchet up every year.
“The law has several overlapping goals,” says Albert Gore, director of the Zero Emission Transportation Association (and son of former Vice President Al Gore). “Sometimes [they’re] all aligned, and other times in competition with each other.”
These battery sourcing requirements, added to the Inflation Reduction Act at the behest of West Virginia Senator Joe Manchin, have been the source of a major headache. Since so many of those components and minerals currently come from China, a lot of EV models won’t make the cut—though we’ll find out exactly which ones will qualify in mid-April, after the automakers do the math on their battery components based on the today’s Treasury guidance, and the government posts the results showing which EVs qualify for tax credits at FuelEconomy.gov.
Congress wrote those restrictions, but it’s the job of the Treasury Department, and by extension the Biden Administration, to actually implement them. That gives the President space for some bureaucratic tinkering in how the IRA mandates go into effect, and they’ve used that to soften the blow of the restrictions. “They had to walk the line between making sure that they were going to support domestic manufacturing and supply chains, but also make sure that the EV tax credits don’t completely grind to a halt,” says Ingrid Malmgren, policy director at Plug in America, an EV policy nonprofit. “It’s no easy task.”
Earlier this year, the Administration shifted around vehicle classifications so that more cars qualify under the price caps (a lot of things count as SUVs now), and it leveraged a legal loophole to let leased vehicles off the hook for much of the restrictions. That means that automakers have someplace to put cars that don’t qualify—they can transfer them to the leasing arm of their business, deduct the tax credit, then lease the cars out to consumers and (hopefully) pass the tax break on to them.
Today, the Administration finally got around to releasing rules to implement the IRA’s critical minerals and battery components restrictions. Those new rules also give a bit of extra leeway. For instance, under the guidance, if most of the value-add for processing a mineral occurred in a country that has a free trade agreement with the U.S., automakers can count it towards the required percentage of U.S.-friendly materials even if a lot of the other processing occurred somewhere else, at least for the next couple years. So, for example, nickel mined and partially refined in a non-free trade country like Indonesia could still count if it’s been more extensively refined and processed in a free trade country like Australia.
Senator Manchin, for his part, is furious over the leeway Treasury is giving automakers. “It is horrific that the Administration continues to ignore the purpose of the law which is to bring manufacturing back to America and ensure we have reliable and secure supply chains,” the senator said in a March 31 statement. “American tax dollars should not be used to support manufacturing jobs overseas.”
The Treasury’s goal has been to smooth the transition to a secure EV supply chain that benefits U.S. workers, but the overarching picture is still a muddled one. The law imposes significant hurdles on EV makers. And though the tangle of restrictions over who and how to qualify for the tax credit may eventually make for fairer tax breaks, cheaper EVs, American jobs, and supply chain security, they’ll also almost inevitably slow the transition to EVs and cleaner air as manufacturers are forced into costly, yearslong campaigns to build out qualifying battery production facilities and mines.
“There’s no chance to even react to do it right,” says Jessica Caldwell, executive director of insights at auto industry guide Edmunds. “You just can’t change that quickly. These are cars. These aren’t sweaters or something.”
The tweaks offered by the Biden Administration may help in the short term. But the problem with administrative band-aids on legislative ink is that a subsequent President—perhaps one not so keen on EVs cutting into oil company profit margins—could easily rip them off. And the sheer complexity baked into the whole new EV incentive mechanism could turn off some EV buyers.
The good news amid all of this confusion, though, is that it’s not up to ordinary people to figure out which vehicles qualify—potential customers will just have to check which cars get posted to the federal fuel economy website. “They don’t need to know how to build the car—they just need to know how to operate it,” Malmgren says. “Same with the tax credit.”