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Most electric vehicles won't qualify for federal tax credit
DETROIT (AP) — A tax credit of up to $7,500 could be used to defray the cost of an electric vehicle under the Inflation Reduction Act now moving toward final approval in Congress.
But the auto industry is warning that the vast majority of EV purchases won’t qualify for a tax credit that large.
That's mainly because of the bill's requirement that, to qualify for the credit, an electric vehicle must contain a battery built in North America with minerals mined or recycled on the continent.
And those rules become more stringent over time — to the point where, in a few years, it's possible that no EVs would qualify for the tax credit, says John Bozzella, CEO of the Alliance of Automotive Innovation, a key industry trade group. As of now, the alliance estimates that about 50 of the 72 electric, hydrogen or plug-in hybrid models that are sold in the United States wouldn't meet the requirements.
“The $7,500 credit might exist on paper," Bozzella said in a statement, “but no vehicles will qualify for this purchase over the next few years.”
The idea behind the requirement is to incentivize domestic manufacturing and mining, build a robust battery supply chain in North America and lessen the industry's dependence on overseas supply chains that could be subject to disruptions.
Production of lithium and other minerals that are used to produce EV batteries is now dominated by China. And the world's leading producer of cobalt, another component of the EV batteries, is the Democratic Republic of Congo.
Though electric vehicles are part of a global effort to reduce greenhouse gas emissions, they require metallic elements known as rare earths, found in places like Myanmar, where an Associated Press investigation has found that the push for green energy has led to environmental destruction.
Under the $740 billion economic package, which passed the Senate over the weekend and is nearing approval in the House, the tax credits would take effect next year. For an EV buyer to qualify for the full credit, 40% of the metals used in a vehicle's battery must come from North America. By 2027, that required threshold would reach 80%.
If the metals requirement isn't met, the automaker and its buyers would be eligible for half the tax credit, $3,750.
A separate rule would require that half the batteries' value must be manufactured or assembled in the North America. If not, the rest of the tax credit would be lost. Those requirements also grow stricter each year, eventually reaching 100% in 2029. Still another rule would require that the EV itself be manufactured in North America, thereby excluding from the tax credit any vehicles made overseas.
Automakers generally don’t release where their components come from or how much they cost. But it’s likely that some versions of Tesla’s Model Y SUV and Model 3 car, the Chevrolet Bolt car and SUV and the Ford Mustang Mach E would be eligible for at least part of the credit. All those vehicles are assembled in North America.
The tax credit would be available only to couples with incomes of $300,000 or less or single people with income of $150,000 or less. And any trucks or SUVs with sticker prices above $80,000 or cars above $55,000 wouldn't be eligible.
There’s also a new $4,000 credit for buyers of used EVs, a provision that could help modest-income households go electric.
The industry says the North American battery supply chain is too small right now to meet the battery component requirements. It has proposed that the measure expand the list of countries whose battery materials would be eligible for the tax credit to nations that maintain defense agreements with the United States, including NATO members.
One component of the bill would require that after 2024, no vehicle would be eligible for the tax credit if its battery components came from China. Most vehicles now have some parts sourced in China, the alliance said.
Sen. Debbie Stabenow, a Michigan Democrat and a leading ally of Detroit automakers, complained that Sen. Joe Manchin of West Virginia, a critical Democratic vote, had opposed any tax credits for EV purchases.
“I went round-and-round with Senator Manchin, who frankly didn’t support any credit of any kind, so this is a compromise,” Stabenow told reporters Monday. “We’ll work through it and make this as good as we can for our automakers.”
Manchin, long a holdout Democrat who negotiated terms of the deal with Senate Majority Leader Chuck Schumer, had blocked previous climate and social spending proposals.
Manchin's office declined to comment. He told reporters last week that he wants automakers to “get aggressive and make sure that we’re extracting in North America, we’re processing in North America and we put a line on China. I don’t believe that we should be building a transportation mode on the backs of foreign supply chains. I’m not going to do it.”
Stabenow asserted that the bill was written by people who don't understand that manufacturers can't simply flip a switch and create a North American supply chain, though they are working on it. Numerous automakers, including General Motors, Ford, Stellantis, Toyota and Hyundai-Kia, have announced plans to build EV battery plants in the United States.
Katie Sweeney, executive vice president of the National Mining Association, said that industry leaders “like the requirement that minerals for batteries be sourced close to home rather than from our geopolitical rivals.”
“Doing that,” she said, "directly supports high-paying jobs here in the United States ... secures our supply chain and really enhances our global competitiveness.”
Stabenow said she remains hopeful that the Biden administration can offer the tax credits next year while it works on the detailed rules for the battery requirements.
“We will continue to work with the automakers and the administration on getting as much common sense into the regulations as possible,” the senator said.
Messages were left Monday seeking comment from the White House and the Treasury Department, which would administer the credits.
Stabenow says she's pleased that the measure would restore tax credits for General Motors, Tesla and Toyota, all of which hit caps under a previous bill and can no longer offer them. Ford, too, she said, is closing in on an EV cap.
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AP Writers Matthew Daly and Fatima Hussein contributed to this report from Washington.
How top-selling electric vehicles will be affected by new tax credit
In a big win for Democrats, Senate passage of the Inflation Reduction Act brings the bill to the House, where the bill is expected to pass. If all goes as planned, the legislation could be in front of President Biden to sign in as little as a couple weeks.
For the automotive industry, a big piece of the legislation is the expansion of the $7,500 federal tax credit for EVs (electric vehicles), in which the cap on automakers to qualify for the credit — which currently is at 200,000 vehicles — will be removed.
While that sounds like good news for the automakers, several requirements have now been introduced that have the automakers claiming 70% of EVs and PHEVs (plug-in hybrid EV) will not qualify for the credit.
“There are 72 EV models currently available for purchase in the United States including battery, plug-in hybrid and fuel cell electric vehicles, says John Bozzella, CEO of the Alliance for Automotive Innovation, a trade group that counts General Motors, Toyota, and Ford as members in a statement. “Seventy percent of those EVs would immediately become ineligible when the bill passes and none would qualify for the full credit when additional sourcing requirements go into effect. Zero.”
These are the main requirements that will change and make the EV tax credits more restrictive:
Final assembly needs to take place in North America
MSRP needs to be below $55,000 for cars, and below $80,000 for trucks and SUVs
Battery material sourcing must be sourced from U.S. or free-trade partners, with phase-in starting in 2024
The final component of battery sourcing, coming in less than two years time, means no EVs will qualify for the credit, according to Bozzella. Note that these are just requirements on the automaker end; the bill adds income requirements on the consumer that will make many high-earning Americans and joint filers ineligible for the tax breaks.
The Automotive Alliance for Innovation lists all the zero emissions EV and PHEVs for sale in America here, along with a map and list of EV and battery manufacturers in America.
Along with that information and quarterly sales reports, Yahoo Finance has verified how the following cars, the top 5 selling EVs and PHEVs in America, will fare under the new rules.
Tesla Model 3 and Model Y
Both U.S.-made Model 3 sedans and Model Y SUVs, the top selling EVs in America, would qualify for the tax credit following passage, a boost for the brand because Tesla is currently phased out of the tax credit. (Note: Tesla does not break out sales between Model 3 and Model Y, but registration data is used as a proxy.)
However, only the lowest trim Model 3 Rear Wheel Drive qualifies (MSRP $46,990). As for the Model Y, both trims qualify (Long Range - $65,990; Performance - $69,990) assuming the government classifies the Model Y as an SUV.
Ford Mustang Mach-E
Coming in second in sales last quarter for EVs and PHEVs was the Ford Mustang Mach-E, with 10,941 units sold. With a starting MSRP of $43,895, the base Mach-E could qualify as a car or SUV, and because the Mach-E is assembled in Mexico, it actually would qualify for the tax credit.
Jeep Wrangler 4xE
The first plug-in hybrid on the list, the Wrangler 4xE, sold 10,861 units last quarter. With it most likely to be categorized as an SUV, and with a starting MSRP of $54,595, it would qualify for the tax break because the Wrangler is made at Jeep’s plant in Toledo, Ohio.
Hyundai IONIQ 5 and Kia EV6
The first non-US brand on the list, the all-electric Hyundai IONIQ 5, which sold 7,448 units in the second quarter, and its sister brand Kia’s EV6 EV sold 7,287 cars. Though the Korean automaker does build cars in the U.S. at a plant in Alabama, the IONIQ 5 and Kia EV 6 are built in South Korea so they would not qualify for the tax credit. This is a blow for Hyundai as the IONIQ 5 and EV6 has been praised by reviewers, and start at a very competitive $39,950 and $33,900 respectively, though the relatively cheap MSRPs may still make both viable options for many Americans despite loss of the credit.
Chevrolet Bolt EV and EUV
GM’s lone entry on the list, the Chevrolet Bolt EV and Bolt EUV, sold 6,945 units last quarter. With a starting price of $25,600, it is the cheapest pure electric vehicle on the market, and with final assembly taking place at GM’s Orion plant in Michigan, the Bolt will continue to qualify for the federal tax credit.
Audi e-tron, Lucid, Polestar 2
Note that popular, sought-after models like the Audi e-tron (country of assembly), Lucid Air (price), Polestar 2 sedan (country of assembly), and Porsche Taycan (price & country of assembly) that currently qualify for the federal tax credit, will not if the bill is signed into law.
All is not lost for manufacturers however, as it may be possible the incentives will no longer so important.
“By the time vehicle manufacturers can take full credit of the act, the market will be ready to accept electric vehicles and the incentives will no longer be necessary,” says Sam Fiorani, Vice President of Global Vehicle Forecasting at AutoForecast Solutions in a statement to Yahoo Finance. “With or without the incentives, the price to the buyer will not change substantially. Incentives like these prop up the price and provide extra profits for the manufacturer.”
Editor's note: this story has been updated to reflect that final assembly of an EV or PHEV has to take place in North America, per the latest draft of the Inflation Reduction Act.
The climate bill could short-circuit EV tax credits, making qualifying for them nearly impossible
James Morton Turner, Professor of Environmental Studies, Wellesley College
Mon, August 8, 2022
The U.S. Senate passed a far-reaching climate, energy and health care bill on Aug. 7, 2022, that invests an unprecedented US$370 billion in energy and climate programs over the next 10 years – including incentives to expand renewable energy and electric vehicles.
Rapid and widespread adoption of electric vehicles will be essential for the United States to meet its climate goals. And the new bill, which includes a host of other health and tax-related provisions, aims to encourage people to trade their gasoline-fueled cars for electrics by offering a tax credit of up to $7,500 for new electric vehicles and up to $4,000 for used electric vehicles through 2032.
But there’s a catch, and it could end up making it difficult for most EVs to qualify for the new incentive.
The bill, which needs House approval, requires that new electric vehicles meet stringent sourcing requirements for critical materials, the components of the battery, and final assembly to qualify for the tax credits. While some automakers, like Tesla and GM, have well-developed domestic supply chains, no electric vehicle manufacturer currently meets all the bill’s requirements.
Building a domestic EV supply chain
At first glance, the revised EV tax credits seem like a smart move.
Existing U.S. policy allows credits for the first 200,000 electric vehicles a manufacturer sells. Those credits helped jump-start demand for EVs. But industry leaders, including Tesla and GM, have already hit that cap, while most foreign automakers’ vehicles are still eligible. The bill would eliminate the cap for individual automakers and extend the tax credits through 2032 – for any vehicle that meets the sourcing requirements.
Right now, China dominates the global supply chain for materials and lithium-ion batteries used in electric vehicles. This is no accident. Since the early 2000s, Chinese policymakers have adopted aggressive policies that have supported advanced battery technologies, including investments in mines, materials processing and manufacturing. I discuss how China got a head start in the race toward a clean energy future in my new book, Charged: A History of Batteries and Lessons for a Clean Energy Future.
Sen. Joe Manchin, the West Virginia Democrat who stalled earlier efforts to get these measures through the sharply divided Senate, said he hopes the requirements will help scale up the U.S. domestic critical minerals supply chain.
The EV incentives would complement other U.S. policies aimed at jump-starting domestic EV manufacturing capacity. Those include $7 billion in grants to accelerate the development of the battery supply chain allocated in the Infrastructure Investment and Jobs Act of 2021 and a $3 billion expansion of the Advanced Vehicle Manufacturing Loan Program included in the current bill, formally known as the Inflation Reduction Act.
The problem is that the Inflation Reduction Act’s sourcing requirements come online so quickly, starting in 2023, and ratchet upward so rapidly, that the plan could backfire. Instead of expanding electric vehicle adoption, the policy could make almost all electric vehicles ineligible for the tax incentives.
Even Tesla’s Gigafactory relies on China
The bill excludes incentives for any new vehicle which contains battery materials or components extracted, processed, manufactured or assembled by a “foreign entity of concern” – a category which includes China.
According to Benchmark Intelligence, a market research firm that tracks the battery industry, China currently controls 81% of global cathode manufacturing capacity, 91% of global anode capacity, and 79% of global lithium-ion battery manufacturing capacity. By comparison, the United States has 0.16% of cathode manufacturing capacity, 0.27% of anode manufacturing capacity, and 5.5% of lithium-ion battery manufacturing capacity.
Even the U.S.’s most advanced battery factories, such as Tesla’s Nevada Gigafactory, currently rely on materials processed in China. Despite Ford’s plans to expand its domestic supply chain, its most recent deals are for sourcing batteries from Chinese manufacturer CATL.
In addition to excluding materials and components sourced from China starting in 2023, the bill also requires that a minimum percentage of the materials and components in batteries be sourced domestically or from countries the U.S. has a fair trade agreement with, such as Australia and Chile. The threshold starts at 40% of the value of critical minerals in 2023 and ramps up to 80% in 2027, with similar requirements for battery components.
If a manufacturer doesn’t meet these requirements, its vehicle would be ineligible for the tax credit. Whether the Treasury Department would come up with exemptions remains to be seen.
Although EV manufacturers are already pursuing plans to develop supply chains that meet these sourcing requirements, proposals for mines and processing facilities often face challenges. Indigenous and environmental concerns have slowed a proposed lithium mine in Nevada. In some cases, key materials, such as cobalt and graphite, are not readily sourced domestically or from fair-trade allies.
Proposed recycling projects could help meet demand. Redwood Materials projects its recycling facility, currently under construction in Nevada, will supply cathode and anode materials to support one million electric vehicles per year by 2025. Despite such optimistic projections, experts anticipate that recycling can only play a small role in offsetting the demand for raw materials needed to scale up electric vehicle adoption in the coming decade.
How much can the bill do to cut emissions?
Clean energy supporters called the bill historic. In addition to a massive investment in renewable energy and electric vehicles, it provides support for technologies such as carbon capture and storage and zero-carbon fuels, and includes a fee to curtail methane emissions, as well as some trade-offs that boost fossil fuels.
Forecasters have projected that the climate package as a whole could help put the U.S. on track to reduce greenhouse gas emissions by about 40% by 2030 compared to 2005 levels – still short of the Biden administration’s goal of a 50% reduction, but closer.
But for the U.S. to hit those goals, electric vehicles will have to replace fossil-fueled vehicles by the millions. A realistic EV tax credit that allows time for manufacturers to diversify their supply chains and makes these vehicles more affordable for all Americans will be crucial. The proposed policy risks short-circuiting EV tax credits just when they are needed most.
This article is republished from The Conversation, a nonprofit news site dedicated to sharing ideas from academic experts. It was written by: James Morton Turner, Wellesley College.
Read more:
Revolutionary changes in transportation, from electric vehicles to ride sharing, could slow global warming – if they’re done right, IPCC says
How a few geothermal plants could solve America’s lithium supply crunch and boost the EV battery industry
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