Billions of dollars set aside in President Biden’s new spending and tax law would reward people who buy electric vehicles, but the tax credits are in jeopardy of never reaching drivers’ pockets.
To produce battery-powered cars and trucks eligible for tax credits of up to $7,500, automakers would have to radically change their sourcing and assembly methods. That’s because China, one of the chief competitors of the U.S., has a stranglehold over roughly 80% of the production of the globe’s rare earth minerals. These elements are critical in producing EV batteries.
Democratic lawmakers, green groups and the auto industry fear that stringent requirements for sourcing most battery materials from North America or free trade partners could render the credits useless over the next few years.
Of the 72 EV models on the market today, 70% are ineligible for the tax credits. None will qualify once additional requirements take full effect in a few years, said John Bozzella, president and CEO of the lobbying group Alliance for Automotive Innovation.
Those in the market for EVs were urged to make their purchases before Mr. Biden signed the legislation to take advantage of current credits.
“We’ve said the legislation’s purchase incentive was a missed opportunity, especially while raw material and battery supply chains are still coming into place,” Mr. Bozzella said. “But Congress also made some meaningful investments on the supply side.”
Large and small automakers alike have expressed skepticism. EV startup Rivian Automotive said the battery requirements timeline “pulls the rug out from consumers.” General Motors warned that “some of the provisions are challenging and cannot be achieved overnight.”
The tax credits also face headwinds from the international community. The European Union and South Korea warned that Mr. Biden’s EV tax breaks could violate World Trade Organization rules because they discriminate against foreign-made vehicles.
International trade dispute aside, EV advocates argue that something is better than nothing in promoting climate-friendly cars, even if the industry must overcome stringent supply chain caveats. The law, dubbed the Inflation Reduction Act, extends the tax credits for the next decade and offers more than $15 billion to help domestic battery manufacturing.
“This is huge. Unfortunately, with this policy, I like to think that with the rose comes the thorn,” Katherine Stainken, vice president of policy at the Electrification Coalition, said during a virtual forum.
Before the law took effect, buyers could receive tax credits only if an automaker sold less than 200,000 EVs. Large manufacturers such as Tesla and General Motors crossed that threshold years ago, and others were fast approaching. The new law offers automakers a chance to change the way they produce EVs and once again sell cars and trucks that qualify for the tax credits.
To be eligible for the tax credits, EVs must be assembled in North America and batteries must be sourced from either the U.S. or free trade partners. By 2029, 100% of battery components will need to come from North America.
New electric-powered SUVs, vans and trucks that cost less than $80,000 are eligible for up to $7,500 in credits. All other EVs must be less than $55,000. Each buyer must have an annual income of less than $150,000. Used EVs that cost less than $25,000 are eligible for up to $4,000 in tax credits. The buyer must earn less than $75,000 a year.
Congressional Budget Office projections crunched by Beia Spiller of the nonpartisan think tank Resources for the Future show that the number of qualifying new EVs sold through next year will equate to less than 1% of the roughly 1.3 million sold in 2021. By 2031, only 190,000 total vehicles are expected to qualify. That’s roughly 13% of those sold in 2021 alone.
The prices of EVs are already increasing. Price hikes announced for new electric vehicles are roughly equal to the amount of the tax credits.
Ford is raising sticker prices for electric vehicles by $6,000 to $8,500. The F-150 Lightning Pro will sell for $46,974, a $7,000 increase from last year’s model. GM last month raised the price of its electric Hummer by $6,250.
Democrats were forced to include the supply chain requirements, income thresholds and vehicle price caps in exchange for the vital support of Sen. Joe Manchin III of West Virginia to get the bill through the 50-50 split Senate.
Mr. Manchin, a conservative Democrat, responded to criticism of the law’s structure by saying it’s up to manufacturers to figure out how to end their reliance on China.
“Get aggressive and make sure that we’re extracting in North America, that we’re processing in North America and that we quit relying on China,” he told reporters this month. “I was very, very adamant that I don’t believe we should be building transportation on the backs of foreign supply chains, and I’m not going to do it. We build our own cars, our own combustible engines. We’ve done everything. All of a sudden, now we can’t? No. Come on, guys. Come on.”
Clean energy advocates acknowledged the need to limit U.S. dependence on foreign adversaries like China for critical minerals. They encouraged, to no avail, more transition time and an expansion of the list of sources for components to include NATO countries.
Abigail Wulf, who heads the critical minerals division at Securing America’s Future Energy, described the tax credits as a “juicy carrot” for automakers to “create responsible supply chains.”
Advocates say a short-term solution would be to offer waivers to smaller manufacturers that face greater barriers to domestic production.
Another is to fast-track permits for energy projects of all forms. Democrats promised Mr. Manchin that they would undertake this contentious political issue in the coming weeks, but it would require Republican support.
“You just can’t get enough of what we need to meet the demand we currently have, let alone new demand. It takes approximately 12 years to get a minerals mine permitted and in place,” said Frank Maisano, a partner at the Washington-based law firm Bracewell who works with fossil fuel and clean energy industries. “These are big problems, and these are just a sliver of our domestic content.”