New rules will make many electric cars ineligible for tax credits

The Biden administration released new rules on Friday that will dramatically shorten the list of electric vehicles eligible for federal tax credits. Officials hope the shift will push automakers to shift their supply chains out of China to the United States or its allies.

The rules, issued by the Treasury Department, are the result of the Cutting Inflation Act, which Democrats passed last year to fight climate change by encouraging the use of zero-emission vehicles and green energy. The law also aims to reduce the industry’s reliance on China, which makes most of the world’s batteries and dominates the processing of critical raw materials.

For purchases of their electric cars to qualify for tax credits of up to $7,500, automakers must meet strict requirements about where they assemble cars and batteries and where they source materials. that go into the batteries. Only a handful of vehicles are expected to qualify for full credit when the rules, which are stricter than previous requirements, come into force on April 18, up from 21 now.

The new rules, which could be revised in response to public feedback, will require that a certain percentage of the components and minerals in each electric car’s battery come from domestic sources or from countries with which the United States has trade agreements. .

The full list of eligible cars won’t be released for a few weeks, but Tesla has started notifying buyers that the changes will affect its lineup. The company said on its website that the cheapest version of its Model 3 sedan, one of the most popular electric cars, will no longer be eligible for full credit. The car uses a battery made in China.

General Motors said Friday that three electric vehicles it plans to sell this year — the Cadillac Lyriq and electric versions of the Chevrolet Equinox and Blazer sport utility vehicles — would qualify for the full credit.

James M. Wickett, a partner at Hogan Lovells who focuses on tax and energy policy, said the electric vehicle tax credit is “shifting supply chains, tens of billions.”

“Details matter significantly,” he added.

An important detail on Friday expanded the program to include battery minerals from Japan and paved the way for the addition of other countries, such as the 27 members of the European Union.

Officials in the United States, Europe and elsewhere have also begun discussing plans to create a kind of buyers’ club for critical minerals that could put pressure on the global industry, including setting labor standards. and higher environmental standards for mining, processing and manufacturing.

The race is on for manufacturers whose vehicles do not qualify for US tax credits to source the minerals and components that will meet the requirements. The credit grants a significant competitive advantage to any successful car.

To be eligible, at least 50% of the components of an electric car battery must be manufactured in North America. And 40% of the minerals used to make the batteries, which often contain nickel, manganese and cobalt, must come from domestic sources or from countries that have trade agreements with the United States. The ore quota will increase every year until it reaches 80% by 2027, and the component quota will increase to 100% in 2029.

The administration said it would later issue rules clarifying how much investment companies could receive from countries like China and Russia while still qualifying for tax credits. The law includes bans on using critical minerals and battery components from a “foreign entity of concern,” a term that includes companies based in China, Russia, North Korea and Iran.

Siyu Huang, chief executive of Factorial Energy, a Massachusetts company that develops advanced batteries with backing from Mercedes-Benz, Hyundai and Stellantis, welcomed the trade deal with Japan. But she said it would be “very difficult” to acquire battery-grade lithium because almost all the refineries are in China.

“The critical part of this is really about where the lithium comes from,” Ms. Huang said.

In writing the rules, Biden officials tried to balance two priorities: encouraging Americans to buy cleaner cars to mitigate climate change and trying to bring in more car factories, batteries and battery materials. to the United States and its allies.

Company executives and some analysts said the administration has come out in favor of the latter goal. Given the limited number of vehicles currently eligible for tax credits, some consumers may decide to wait to buy an electric car until others become eligible in a few years, said William Reinsch, holder of the Scholl Chair in International Business at the Center for Strategic and International Studies, a Washington think tank.

“What always happens if people are uncertain is that they keep their wallets,” Reinsch said.

Jennifer Safavian, chief executive of Autos Drive America, which represents foreign automakers like Toyota, Honda and Volkswagen, welcomed Japan’s inclusion and said it would help strengthen supply chains. Still, she added, the decline in the number of eligible cars would slow the growth of electric cars.

But some lawmakers complain that the Biden administration has been too generous to foreign companies. Sen. Joe Manchin III of West Virginia, a central player in the drafting and passage of the Cut Inflation Act, said this week he may file a lawsuit challenging the interpretation of the law by the administration.

In a statement on Friday, Manchin said the Treasury Department guidelines “completely ignore the intent” of the law.

“It’s horrifying that the administration continues to ignore the purpose of the law, which is to bring manufacturing back to America and ensure that we have reliable and secure supply chains,” he said. “American taxpayers’ money should not be used to support manufacturing jobs overseas.”

The legislation has already shaken up the auto industry. Immediately after President Biden signed the bill in August, a provision excluded from the tax credits any electric vehicle not manufactured in the United States, Mexico or Canada.

Hyundai and Kia cars made in South Korea no longer qualify, angering that country’s leaders, who felt betrayed by a close military and trade partner. Sales of electric vehicles made in South Korea have since lost market share in the United States.

The law also proved to be a major source of diplomatic friction. Leaders of the European Union, Japan and other US allies feared the program would divert 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 these countries, including battery materials, were not eligible for any part of the tax credits.

Under pressure from foreign governments, the Biden administration offered a workaround. In a press release, the Treasury Department said the law does not define the term “free trade agreement,” which “could include recently 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 was sharply criticized by congressional lawmakers, who said the administration had not consulted them on trade policy, or claimed that US taxpayers’ money would now subsidize Japanese industry.

For consumers, the new rules risk making many electric vehicles more expensive.

At least some Tesla vehicles will likely remain eligible. The company makes cars in California and Texas and batteries in Nevada. Ford Motor said it would “soon” disclose if any of its vehicles were eligible.

Automakers will need to certify whether their vehicles meet component and mineral requirements. The Internal Revenue Service will enforce the rules. Some vehicles may only get half the credit if, for example, they meet component quotas but not mineral quotas.

The list of eligible cars is expected to grow as it becomes easier for companies to buy processed lithium and other materials from U.S. trading partners like Canada and Australia. Many companies are developing mines and building refineries. More cars will also qualify once Hyundai, Ford, Honda and other automakers finish building new car and battery factories in the United States.

And a loophole in the law allows companies to collect the credits if they lease vehicles to customers, even if the cars don’t meet sourcing and manufacturing requirements. Automakers and their dealerships could pass these credits on to consumers by reducing monthly lease payments.

Alan Rappeport contributed report.