President Biden’s climate law, the Inflation Reduction Act (IRA) of 2022, provides up to $7,500 in tax credits to consumers who buy electric vehicles made in the United States, using largely domestic materials. The law includes a general ban on Chinese products, orchestrated by Senator Manchin, Chairman of the Senate Energy & Natural Resources Committee, who was the deciding vote on the Democrat-passed bill. Lawmakers mandated that firms in China, Russia, North Korea and Iran be prohibited from providing certain materials to cars that received those tax breaks. The law, however, left open several questions, including what constitutes a Chinese or Russian company. According to Biden Administration officials, any entity that was incorporated or had headquarters in China or Russia, as well as any firm in which 25 percent of the board seats or equity interest is held by Chinese or Russian governments constitutes a Chinese or Russian company.
Senator Manchin is unhappy with the EV tax credit rules that the Department of the Treasury released on December 1, allowing Chinese companies who set up operations outside China to benefit, as long as the Chinese government is not a significant shareholder. Manchin accused the Biden administration of “trying to find workarounds and delays that leave the door wide open for China to benefit off the backs of American taxpayers”. The Treasury interpretation of the law was a relief to automakers, who need Chinese technology, parts and minerals for their EV business and had feared that the Biden administration would ban them from contracting with Chinese-owned mines or factories in the United States or other parts of the world. That was the original intent of the IRA, at least to Senator Manchin.
IRA also requires battery makers undertaking contracts or licensing agreements with Chinese firms to ensure they are retaining rights over their projects. Some lawmakers have challenged Ford’s plans to license technology from the Chinese battery company CATL for a plant in Marshall, Michigan, arguing that such a partnership should not be eligible for federal tax credits. The Treasury rules did not make it clear whether vehicles produced under Ford’s license agreement with CATL would receive the tax credit.
The rules could have a profound effect on the U.S. electric vehicle market, which made up about 8 percent of new cars sold in the third quarter. EV car sales, however, are not growing quick enough given all the electric vehicles sitting on auto dealer lots, as some dealers have a 12-month backlog of vehicles. Concern about electric vehicle range and the availability of chargers are holding back electric vehicle sales. Despite $7.5 billion for chargers in the IRA, the Biden Administration has a “net zero” record for charger deployment.
It is yet unclear which EV models would qualify for the full tax credit. The new rules kick in for battery components in 2024, and in 2025 for critical minerals like lithium, cobalt and nickel. Many cars have been disqualified from the tax credits by other rules, like a requirement that vehicles be assembled in North America. Only about 20 vehicles currently qualify for the subsidy program out of more than 100 electric vehicles sold in the United States. According to Tesla, the two least expensive versions of its Model 3 sedan would qualify for only half the $7,500 credit starting in January. The Model Y SUV also might not qualify for the full credit after December 31. The Model Y and Model 3 are the top two electric vehicles by sales in the United States. Tesla buys some batteries from CATL.
The Treasury rules also exempt trace materials. If the Biden administration banned all minor Chinese parts from the supply chain, no car models might have qualified for tax credits next year.
The rules also raised new issues about whether stricter requirements for supply chains could continue a trend of driving more consumers to lease, rather than buy, vehicles. The Treasury Department rules issued earlier allowed leased vehicles to receive the full EV tax credit, regardless of where the components came from. That is, the prohibition on sourcing from China applies only to vehicles that are sold, not to those that are leased. Because consumers can receive tax credits for electric vehicles they lease from auto dealers, electric vehicle leasing has boomed.
Over the past year, companies have invested $213 billion in the manufacturing and deployment of “clean” energy, “clean” vehicles, building electrification and carbon management technology in the United States–a 37 percent increase from a year earlier. But, the global electric vehicle industry remains anchored in China, which is the world’s largest producer and exporter of electric vehicles. China produces about two-thirds of the world’s battery cells and refines most of the minerals that are key to powering an electric vehicle. China processes more than half of the world’s lithium, cobalt and graphite, which are crucial inputs.
The rules also restrict automakers from sourcing nickel used in their batteries from Russia, which is one of the world’s largest nickel producers. Efforts to start new nickel mines in the United States have been stymied by the Biden Administration.
One of the challenges for automakers will be developing systems to track all the components of their battery through the supply chain. The rule, which has a 30-day comment period, establishes the beginnings of a system for automakers to track critical minerals contained in their cars from the source and for the IRS and the Energy Department to review the materials that automakers procure. For example, car makers have a two-year transition period to adapt to regulations for small battery parts that lack tracing standards, such as electrolyte salts. Vehicles that are reported incorrectly will be subtracted from an automaker’s eligibility for tax credits, and automakers that commit fraud or intentionally disregard the rules could be declared ineligible for the tax credit in the future.
Conclusion
Treasury released additional rules on December 1 concerning which vehicles would receive the full EV tax credit based on the IRA, a Democrat-passed bill in 2022. One of the issues was to define what constitutes a Chinese or Russian company—guidance that Senator Manchin finds as “another example of the Biden administration clearly breaking the law to try to implement a bill that it could not pass.” Unless auto makers follow the Treasury Department’s measures, however, new EV supply-chain companies could lose access to $6 billion in federal grants and auto makers would not be able to offer customers all or part of a $7,500 tax rebate on EV purchases.
Senator Manchin is correct in his taking issues with the Treasury Department guidance, which works around the intent of the law in developing an EV industry in the United States. While the United States has critical mineral resources, the Biden administration is not allowing new mines to be developed to further the industry. Biden has revoked leases, delayed permits and placed fauna and flora on the endangered list to avoid developing new mines. Further, EPA regulations would make it difficult to develop critical mineral processing facilities that are needed for making the minerals usable for EV manufacturing. And, as the Biden administration is ridding the United States of its affordable and reliable coal plants, the industry would have a problem competing with China for cheap electricity needed for the energy-intensive industry. China has spent decades gearing up for the energy transition and has left the United States in the dust. Biden is not helping as he is garnering votes from his environmental friends for his reelection bid in 2024.
