Considering an EV? Here’s what to know about the new tax credits

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When the Biden administration’s proposed rule for which vehicles qualify for its revamped EV tax credit goes into effect on April 18, the number of eligible cars will actually shrink.

President Joe Biden and auto companies face a conundrum as they try to exponentially increase the number of electric vehicles on the road: The federal tax credit to help American consumers save up to $7,500 on an EV comes with incredibly complex requirements – including that their batteries and components must have come from the US or countries it has a free-trade agreement with.

The new tax credits were crafted in the Inflation Reduction Act by Democratic Sen. Joe Manchin of West Virginia, who sought to move the EV supply chain away from China, which has long dominated the industry.

It’s a difficult task that could take years to accomplish. And it will significantly reduce the number of zero-emission vehicles American taxpayers can purchase under the plan in the meantime.

Senior Biden administration officials were candid that the new requirements will make it more difficult in the “short-term” for consumers to take advantage of the new tax credits.

“The critical minerals and battery component requirements will reduce the number of electric vehicles currently eligible for the full credit in the short-term, in order to create incentives to bring supply chains and manufacturing to the US,” a senior US Treasury Department official told reporters. “However, we believe these requirements will significantly increase the number of vehicles made and sold in the US over the next decade.”

In other words, it could take automakers years to build the American-dominated supply chain needed to meet Manchin’s vision, though it’s one that they have embraced. Automakers have said that the bill was good for the US auto industry, and it is already encouraging them to build out their operations in the country and hire thousands of new workers.

The timeline is “really the million-dollar question,” said Thomas Boylan, a former Environmental Protection Agency official and the regulatory director for the EV trade group Zero Emission Transportation Association.

Boylan added that time is of the essence, as there’s significant momentum on electric vehicles, which are still too expensive for many car-buyers. Consumers who are interested in buying an EV but need the financial assistance from tax credits may not be willing to wait years to buy the car they want, he added.

The new tax credit and the guidance are complex, and more information will be coming out in the coming weeks and months. Here’s what you need to know.

Currently, 21 vehicles are eligible for federal tax credits up to $7,500. That will change on April 18, when Treasury’s new guidance goes into effect.

We don’t know yet. Senior administration officials declined to share an estimate, as automakers still need to determine which of their vehicles might qualify under the new rules. But the number will likely be much lower than 21.

Carmakers will also specify which EVs qualify. Ford Motor Company President and CEO Jim Farley said in a statement that the company would “help our customers determine whether they’re eligible to receive incentives,” and noted that it would share more information “soon.”

The clearest impact on consumers will be the reduced number of vehicles eligible for credits starting April 18. Some cars that are currently eligible will be removed under the new rule. More cars will be added to the list as automakers scramble to move their factories and supply chains to the US and other countries with these free trade agreements, but that could take months or even years.

Under the new rule, consumers can get up to $7,500 in tax credits on eligible cars. There is no limit to the number of EVs automakers can sell with tax credits, as long as those vehicles meet the requirements. This is a change from the previous rule, which capped the number of vehicles that could be sold with the tax incentives.

The new Treasury rule on EVs comes from the Inflation Reduction Act, the climate and clean energy law passed by Congress last year. Manchin, who authored much of the IRA, changed the federal EV tax credits to move the supply chain for the critical minerals needed for things like EV batteries, solar panels and smaller rechargeable batteries away from China.

There are two major requirements that auto makers need to meet if they want their EVs to be eligible for the $7,500 tax credit: a critical mineral requirement and a battery component requirement – which are each worth $3,750.

The critical mineral requirement mandates a certain percentage of the value of the critical minerals that power EV batteries – like lithium, nickel, graphite and copper – must be extracted or processed in the United States, or a country that it has a free-trade agreement with. The minerals could have also been recycled in North America. The battery component requirement mandates that a certain percentage of the value of the battery components must be manufactured or assembled in North America.

Importantly, these requirements will ramp up over several years. For critical minerals, the percentage will start at 40% in 2023 and ramp up each year to 80% by 2027. For battery components, the percentage will start at 50% and ramp up each year to 90% by 2028.

Administration officials and experts agree the rules are incredibly complicated to implement in a very short timeframe.

“They’re just quite complex,” White House senior adviser John Podesta recently told CNN.

Cars that were previously on the tax credit list could be removed on April 18. The administration said it expects more

Twenty-one countries will have free trade agreements on critical minerals with the US: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore and Japan.

Countries including Chile and Australia are notable – both have a vast supply of lithium and extensive mining operations. Senior administration officials said the new rule will make these countries’ lithium more competitive; instead of going to China the minerals could go to Japan or Korea – or directly to the US. Korea, Mexico and Japan have major car assembly operations, and many of those cars end up sold in the US.

Biden has said the US is also negotiating adding the European Union to the list, and others could be added in the future.

Administration officials are working on additional guidance that would bar auto companies from using minerals sourced from foreign entities of concern – like China – in their electric vehicles qualifying for the tax credit.

That has yet to be proposed and will eventually go into effect for battery components starting in 2024 and critical minerals starting in 2025.

The last few months have seen a wave of announcements from car companies that are moving their EV and battery production factories to the US and neighboring countries.

But experts and officials say that the start of the critical mineral supply chain – mining and refining critical minerals – will be the most difficult aspect to change. That’s in large part because China has a tight grip on it. The US has just a few lithium mines, located in Nevada. Companies are vying to start mining lithium around California’s Salton Sea, though no commercial operations have started yet.

The Department of Energy “can give a loan to build a battery manufacturing facility,” Boylan said. “It’s a whole different ballgame from talking about permitting an open-pit lithium mine.”

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