Due to new rules, many electric cars are not eligible for tax reductions

The Biden administration released new rules on Friday that will significantly shorten the list of electric vehicles eligible for federal tax credits. Officials hope the change will prompt automakers to move their supply chains from China to the United States or its allies.

The rules, issued by the Ministry of Finance, are the result of the Law on Inflation Reduction, that Democrats passed last year to fight climate change by encouraging the use of zero-emission vehicles and green energy. The law also aims to reduce the industry’s dependence on China, which produces most of the world’s batteries and dominates processing of critical raw materials.

For purchases of their electric cars to qualify for up to $7,500 in tax credits, automakers must meet strict requirements for where they assemble the cars and batteries and where they source the materials that go into batteries. Only a handful of vehicles are expected to qualify for the full credit when the rules, which are stricter than previous requirements, go into effect on April 18, instead of now on April 21.

The new rules, which are subject to revision in response to public backlash, require a certain percentage of the components and minerals in every electric car’s battery to come from domestic sources or countries with which the United States has trade agreements.

The full list of eligible cars won’t be published in the coming weeks, but Tesla has begun to inform buyers that the changes will affect the lineup. The company said on its website that the cheapest version of its Model 3 sedan, one of its most popular electric cars, would no longer qualify for the full credit. The car uses a battery made in China.

James M. Wickett, a partner at Hogan Lovells who focuses on tax and energy policy, said the electric vehicle tax credit “moved supply chains in motion, to the tune of tens of billions.”

“The details matter,” he added.

An important detail on Friday expanded the program to include battery minerals from Japan and paved the way for more countries to be added, such as the 27 members of the European Union.

Officials in the United States, Europe and elsewhere have also started discussing plans to build a buyer’s club of sorts for critical minerals that could put pressure on global industry, including setting higher labor and environmental standards for mining, processing and production.

The race is on for manufacturers whose vehicles don’t qualify for the U.S. tax credits minerals and components that will meet the requirements. The credit assigns a significant competitive advantage to any car that makes the mark.

To qualify, at least 50 percent of the components in an electric car battery must be made in North America. And 40 percent of the minerals used to make the batteries, which often contain nickel, manganese and cobalt, must come from domestic sources or countries that have trade agreements with the United States. The mineral quota will increase each year to 80 percent by 2027, and the component quota will increase to 100 percent by 2029.

The government said it would later issue rules clarifying how much investment companies can receive from countries such as China and Russia and still qualify for tax credits. The law prohibits the use of critical minerals and battery components from a “foreign entity of concern”, a term includes companies based in China, Russia, North Korea and Iran.

Some car manufacturers have urged the administration to take a light touch, saying that stricter restrictions would make few cars eligible for tax credits.

In writing the rules, Biden officials have tried to balance two priorities: encouraging Americans to buy cleaner cars to fight climate change, and trying to bring more car, battery and battery materials factories to the United States and its allies. to fetch.

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Some consumers might decide to hold off on buying an electric car until more vehicles qualify for tax credits in a few years, said William Reinsch, the Scholl Chair in International Business at the Center for Strategic and International Studies, a think tank. in Washington.

“What always happens when people are insecure is they hold onto their wallets,” Mr Reinsch said.

The legislation has already shaken up the auto industry. Immediately after President Biden signed the bill into law in August, a provision was excluded from the tax credits for electric vehicles not made in the United States, Mexico or Canada.

Hyundai and Kia cars made in South Korea were no longer eligible, angering that country’s leaders, who felt betrayed by a close military and trading partner. Sales of South Korean-made electric vehicles have since lost market share in the United States.

The law turned out to be a major source of friction diplomatic. Leaders of the European Union, Japan and other US allies feared the program would lure investment away from their countries or force them to offer more generous subsidies to compete with the United States.

Because the European Union, Japan and Britain do not have free trade agreements with the United States, products from those countries, including battery materials, were not eligible for any portion of the tax credits.

Under pressure from foreign governments, the Biden administration proposed a solution. In a press release, the Treasury Department said the law did not define the term “free trade agreement,” which “could include newly negotiated critical minerals agreements.” The Biden Administration signed a limited trade agreement with Japan on Tuesday on critical minerals, and is negotiating a similar deal with the European Union.

But the strategy has led to scathing criticism from legislators in Congress who have said the administration has not consulted them on trade policy. Some lawmakers also argue that US taxpayers’ money will now subsidize Japanese industry.

Senator Joe Manchin III of West Virginia, a critical player in the writing and passage of the Inflation Reduction Act, said in a statement that the Treasury Department’s guidelines “completely ignore the intent of the law.” He urged the White House to “stop this now – just follow the law”.

“It’s appalling that the government continues to ignore the purpose of the law, which is to bring production back to America and make sure we have reliable and safe supply chains,” he said. “U.S. tax dollars should not be used to support manufacturing jobs abroad.”

It is not clear how many vehicles are eligible for credits under the new rules.

In any case, some Tesla vehicles will likely remain eligible. The company makes cars in California and Texas and batteries in Nevada. General Motors may also qualify soon because it has begun battery production in Ohio in a joint venture with LG Energy Solution.

Hybrid vehicles are eligible if they meet the other requirements and their batteries have a capacity of at least 7 kilowatt hours.

Automakers will need to certify that their vehicles meet component and mineral requirements. The Tax and Customs Administration will enforce the rules. Some vehicles may qualify for only half the credit if, for example, they meet component quotas but not mineral quotas.

The list of eligible cars is expected to grow as it becomes easier for companies to purchase processed lithium and other materials from U.S. trading partners such as Canada and Australia. Numerous companies are developing mines and building refineries.

Hyundai is building a factory in Georgia, which will allow the company’s cars to collect credits in 2025 once production starts. Ford, Honda and many others are building battery factories in the United States.

And a loophole allows companies to collect the credits when they lease vehicles to customers, even if the cars don’t meet procurement and production requirements. In fact, people who lease electric vehicles could benefit indirectly from the credits if car manufacturers and car dealers pass the credit on to them by demanding lower monthly payments.

Alan Reportport reporting contributed.