The Biden administration proposed a series of highly-anticipated rules, providing some clarity on how it will implement Inflation Reduction Act (IRA) provisions that restrict which electric vehicles (EV) are eligible for tax credits.
The rules, issued by the Treasury Department on Friday morning, outline the sourcing requirements for critical minerals and battery components automakers must use in EV batteries to ensure eligibility for the full $7,500 credit. The IRA — which President Biden signed into law in August — was crafted by lead sponsor Sen. Joe Manchin, D-W.Va., to bolster domestic EV battery supply chains and reduce reliance on hostile nations like China.
“The Inflation Reduction Act is a once-in-a-generation piece of legislation that is lowering costs for American consumers, building a strong U.S. industrial base, and bolstering supply chains,” said Treasury Secretary Janet Yellen. “Today, Treasury is taking an important step that will help consumers save up to $7,500 on a new clean vehicle and hundreds of dollars per year on gas, while creating American manufacturing jobs and strengthening our energy and national security.”
However, because the U.S. supply chain currently sources an outsized share of its critical minerals and EV battery components from China and other foreign nations, the rules Friday could greatly restrict which EVs will ultimately be eligible for the tax credits. The Biden administration has set lofty goals as part of its climate agenda to ensure 50% of new car sales are electric by 2030.
A Biden administration told reporters during a call ahead of the announcement Friday that they were unsure how many vehicles would actually be eligible for the tax credit under its proposed rules.
And though the rules provide clarity for how the administration plans to implement the IRA’s tax provisions, the Treasury Department declined to outline how it will implement one of the key requirements for EV batteries. The IRA bars EVs assembled with any battery components or critical minerals sourced from a “foreign entity of concern” beginning in 2024 and 2025, respectively.
Because China falls into that classification, the bill would disqualify EVs with Chinese-sourced components and minerals from being eligible for the credit. China currently boasts 78% of the world’s cell manufacturing capacity for EV batteries, according to a Brookings Institution analysis released in July. An Administration official said details on its implementation of that provision would come at a later date.
The Treasury Department announcement Friday, though, did explain that, to meet the broader critical mineral requirement, 40% of critical minerals contained in an EV’s battery must have been extracted or processed in the U.S. or country the U.S. has a free trade agreement with, beginning in 2023. The share of critical minerals then increases 10% in each subsequent year until 2027 when 80% of minerals must be sourced under the conditions.
The announcement listed 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 as the eligible nations.
While automakers have yet to weigh in on the proposed rule, the rule may create uncertainty since it appears to open the door for companies to extract critical minerals in the listed nations, but process those minerals in an unlisted nation. A Biden administration official told reporters that the rule was intended to incentivize companies to only extract and process minerals in listed nations.
“It will ensure we can work with our allies and partners to reduce our reliance on China and bolster our national security,” a White House official told reporters earlier in the call.
And to meet the battery component requirement, the Treasury Department stated in its rules that, beginning in 2023, at least 50% of an EV’s battery components must be manufactured or assembled in North America. That percentage increases in subsequent years until it reaches 90% in 2028.
EVs that meet both the critical mineral and battery component requirements are eligible for the full $7,500 credit. Vehicles that meet just one of the requirements are eligible for a $3,750 credit.
In addition, all EVs must also have undergone final assembly in North America; cost less than $55,000, or $80,000 for larger vehicles; and be purchased by an individual with an annual income of less than $150,000 or a family with an annual income of $300,000.