The Biden administration will allow consumers to get up to $7,500 on tax credits for electric vehicles containing Chinese graphite through 2026–a two-year extension, making it easier for car manufacturers to make and sell vehicles eligible for the tax credit. The Treasury Department published final rules governing the tax credits, which are designed to encourage EV production and push supply chains for minerals and batteries into the United States. Democrats in Congress expanded EV tax credits in the 2022 Inflation Reduction Act (IRA) to spur rapid electrification of the passenger-automobile fleet, but included a series of escalating requirements that the vehicles exclude critical minerals and other materials from some foreign countries, especially China. China produced about 77 percent of the world’s graphite in 2023 compared to none for the United States.
The graphite restriction was set to take effect in 2025, and because most graphite comes from China, the number of electric vehicles eligible for the tax credit would have dropped, reducing EV sales. Only 22 of 122 EV models on sale in the United States currently qualify for part or all of the $7,500 tax credit. Industry officials objected to the 2025 date as it would be harder to meet Biden’s EV mandates and they would have to pay fines for not meeting EV sales targets. The federal government also determined that it was too difficult to trace the origin of graphite because natural graphite is often mixed with synthetic graphite made from petroleum coke. Other low-value materials, including minerals contained in electrolyte salts and electrode binders, get similar treatment.
To qualify for the two-year extension, automakers must show the government how they will reorient their supply chains and document the origins of their graphite. Because it can take a long time to reshape manufacturing processes, companies will need to move quickly to find more graphite sources outside China so they have electric vehicles eligible for the tax credit in early 2027.
Not Everyone is Happy About the Extension
Sen. Joe Manchin (D., W.Va.), an author of the IRA legislation who pressed for measures to remove Chinese materials from EV supply chains, criticized the Treasury’s two-year extension. He said it delays domestic investment while benefiting “foreign adversaries” such as China and Russia. “Treasury has provided a long-term pathway for these countries to remain in our supply chains,” Manchin said. “It’s outrageous.”
The North American Graphite Alliance, which represents producers, said it was disappointed that automakers were given more time to wean themselves from Chinese graphite. It urged the administration to hold firm to the new timeline, so that car companies and battery makers will lock into purchase contracts for 2027.
Automakers Make Changes to Supply Chains
To get their electric vehicles to qualify for the tax credit, automakers have been adjusting their supply chains for batteries and minerals that have been heavily dependent on China. Car companies and their joint-venture partners are spending tens of billions of dollars to construct battery factories in the United States, allowing companies to qualify some models for a portion of the tax credit that requires that electric vehicles batteries are made in North America–a threshold that began this year. The mineral rules, however, are harder on auto supply chains because most of the core raw materials, such as lithium, nickel, graphite and manganese, are either extracted or processed in China. China is especially adept at processing the minerals to make them market-ready from their raw or concentrated form, using inexpensive coal power.
The various phase-ins of the IRA rules have resulted in some EV models falling in and out of eligibility as new rules take effect. The battery requirements that began in January rendered several models ineligible because certain components were sourced from outside North America. General Motors, for example, built about 20,000 electric vehicles—including the Chevrolet Blazer and Cadillac Lyriq SUVs—that did not qualify because of the battery rules. In March, the company adjusted its supply to regain eligibility for those models. Companies appear to be concentrating more on pleasing the government’s EV demands than they have been on meeting consumer demands, judging by the slowing EV demand in the auto market.
Conclusion
The Biden administration recently made a number of rule changes that impact the EV tax credit. The rules specify how much government ownership and control in foreign places such as China makes a supplier a “foreign entity of concern.” They detail how consumers can claim the credits when they purchase new and used cars from dealers rather than waiting to get them on their tax returns. So far this year, more than 100,000 credits worth more than $700 million have been claimed at the point of sale.
One of the recent changes allows automakers to continue to use graphite from China in their electric vehicles through 2026 as the industry indicated that they needed more time to find other suppliers. The Treasury Department also noted that the origin of graphite supplies was difficult to track and is allowing automakers the 2-year extension as long as they work on changing suppliers and document the origin of their graphite. Biden is again doing all it can to get Americans to change their personal mode of transportation to electric vehicles and to allow China to keep its dominance in mineral supply chains and EV batteries.
