The Biden administration released new rules on Friday that would significantly reduce the list of electric vehicles that qualify for federal tax credits. Officials believe the change will prompt automakers to move their supply chains out of China and into the United States or its allies.
The rules, released by the Treasury Department, are the result of the Inflation Reduction Act, which Democrats passed last year to fight climate change by encouraging the use of zero-emission vehicles and green energy. The law also seeks to reduce the industry’s dependence on China, which produces most of the world’s batteries and dominates the processing of critical raw materials.
To qualify for tax credits of up to $7,500 for the purchase of their electric cars, automakers must meet strict requirements on where they assemble the cars and batteries and where they source the materials that go into the batteries. Only a handful of vehicles are expected to qualify for the full credit when the rules, which are more stringent than previous requirements, take effect on April 18, compared to 21 now.
The new rules, which could be amended in response to public feedback, require that a certain percentage of the components and minerals in each electric car’s battery come from domestic sources or countries that have trade agreements with the United States.
The full list of eligible cars won’t be released for two weeks, but Tesla has begun notifying buyers that the changes will affect its lineup. The less expensive version of its Model 3 sedan, one of its most popular electric cars, will no longer qualify for the full credit, the company said on its website. This car uses a battery made in China.
James M., a partner at Hogan Lovells who focuses on tax and energy policy; Wickett said the electric vehicle tax credit “moves supply chains into the tens of billions.”
“Details are remarkably important,” he added.
A notable detail on Friday expanded the program to include battery minerals from Japan and paves the way for the inclusion of more countries, such as the 27 members of the European Union.
Officials in the United States, Europe and elsewhere have begun discussing plans to create a kind of buyers’ club for critical minerals that could put pressure on the global industry, including setting higher labor and environmental standards for mining, processing and production.
There is competition for manufacturers of vehicles that do not qualify for US tax credits to buy minerals and components that meet the requirements. Credit rating gives any car a significant competitive advantage.
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 batteries, which contain nickel, manganese and cobalt, must come from domestic sources or countries that have trade agreements with the United States. The mineral quota will rise each year until it reaches 80 percent in 2027, and the component quota will rise to 100 percent in 2029.
The administration said it would later release rules clarifying how much investment companies can receive from countries such as China and Russia and still qualify for tax breaks. The Act includes restrictions on the use of critical minerals and battery components by a “foreign company of concern”. including Companies in China, Russia, North Korea and Iran.
There are some auto manufacturers Administration was stressed A slight touch should be taken, saying that stricter restrictions may leave some cars eligible for tax breaks.
In writing the rules, Biden officials tried to balance two priorities: encouraging Americans to buy cleaner cars to help mitigate climate change, and trying to bring factories for cars, batteries and battery products to the United States and its allies.
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Some consumers may wait to buy an electric car until more vehicles qualify for the tax breaks in a few years, said William Rainch, Scholl Chair for International Business at the Center for Strategic and International Studies, a Washington think tank.
“What always happens when people are uncertain, they hold on to their wallets,” Mr. Rainch said.
The law has already shaken the auto industry. Soon after President Biden signed the bill into law in August, electric vehicles not made in the United States, Mexico or Canada were excluded from the tax credits.
Hyundai and Kia cars made in South Korea no longer qualify, angering the country’s leaders, who feel betrayed by a close military and trading partner. Sales of South Korean-made electric vehicles have lost market share in the United States.
The Act also proved to be a major source of diplomatic friction. Leaders of the European Union, Japan and other US allies fear the plan will attract investment 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 products, are not eligible for any part of the tax breaks.
Under pressure from foreign governments, the Biden administration proposed a solution. In a news release, the Treasury Department said the law does not define the term “free trade agreement” to include “newly negotiated critical mineral agreements.” The Biden administration on Tuesday signed a limited trade deal with Japan covering critical minerals, and is negotiating a similar deal with the European Union.
But the strategy has drawn blistering criticism from lawmakers in Congress, who say the administration has failed to consult with them on trade policy. Some lawmakers argue that American taxpayer money will now subsidize Japanese industry.
Senator Joe Manchin III of West Virginia, who played a key role in the writing and passage of the anti-inflation law, said in a statement that the Treasury Department’s guidance “totally ignores the intent” of the law. “Stop it now — follow the law,” he urged the White House.
“It is appalling that the administration continues to ignore the intent of the law, which is to bring manufacturing back to the United States and ensure reliable and secure supply chains,” he said. “US tax dollars should not be used to support manufacturing jobs overseas.”
It is not clear how many vehicles will qualify for the loan under the new rules.
At least some Tesla vehicles will be eligible. The company manufactures cars in California and Texas and batteries in Nevada. General Motors could soon qualify as it has begun manufacturing batteries in Ohio in a joint venture with LG Energy Solutions.
Hybrid vehicles qualify if they meet other requirements and their batteries have a capacity of at least 7 kilowatt-hours.
Car makers are required to certify that their vehicles meet the requirements for components and minerals. The Internal Revenue Service will enforce the rules. Some vehicles, for example, may only qualify for half the credit if they meet the component quota and not the minerals quota.
The list of eligible cars is expected to grow as companies find it easier to buy processed lithium and other materials from U.S. trading partners such as Canada and Australia. Many companies build mines and refineries.
Hyundai is building a factory in Georgia, allowing the company’s cars to collect loans when production begins by 2025. Ford, Honda and others are building battery plants in the US.
A loophole in the law allows companies to collect loans if they lease vehicles to customers even if the cars don’t meet the provenance and production requirements. In fact, people who lease electric vehicles can indirectly benefit from credits if automakers and car dealers offer them loans by requiring smaller monthly payments.
Alan Rapport Contributed report.