The Biden administration released new rules on Friday that will significantly shorten the list of electric vehicles that qualify for federal tax credits. Officials hope the change will push automakers to move their supply chains out of China and into the United States or its allies.
The rules, issued 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 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.
In order for purchases of their electric cars to qualify for up to $7,500 in tax credits, 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 stricter than previous requirements, come into effect on April 18, up from the 21st.
The new rules, which could be revised in response to public feedback, will require a certain percentage of the components and minerals in each electric car’s battery to come from domestic sources or countries with which the United States has trade agreements.
The full list of qualifying cars won’t be released for a couple of weeks, but Tesla has begun informing buyers that the changes would affect its lineup. The company said on its website that the least expensive version of its Model 3 sedan, one of the most popular electric cars, would no longer be eligible for the full credit. The car uses a battery made in China.
James M. Wickett, a partner at Hogan Lovells who focuses on tax and energy policy, said the electric vehicle tax credit “is moving supply chains, to the tune of tens of billions.”
“Details matter in a significant way,” he added.
A significant detail on Friday expanded the program to include battery minerals from Japan and paved the way to add more countries, such as the 27 members of the European Union.
Officials in the U.S., Europe and elsewhere have also begun discussing plans to build a kind of critical minerals buyers’ club that could put pressure on the global industry, including setting higher labor and environmental standards for mining, processing and manufacturing.
The race is on for manufacturers whose vehicles do not qualify for US tax credits to acquire the minerals and components that do. The credit gives any car that gets the rating a significant competitive advantage.
To be eligible, at least 50 percent of the components in an electric car battery must be manufactured in North America. And 40 percent 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 share of minerals will increase each year until reaching 80% in 2027, and the share of components will rise to 100% in 2029.
The administration said it would later issue rules clarifying how much investment companies from countries like China and Russia could receive and still qualify 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.
Some automakers have urged the administration to tread lightly, saying tougher restrictions could leave few cars eligible for tax credits.
In writing the rules, Biden officials have tried to balance two priorities: encouraging Americans to buy cleaner cars to mitigate climate change and trying to bring more auto factories, batteries and battery materials to the United States and its allies
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Some consumers may decide to wait to buy an electric car until more vehicles are eligible for tax credits in a few years, said William Reinsch, the Scholl Chair in International Business at the Center for Strategic and International Studies, a think tank of Washington.
“What always happens if people aren’t sure is they hold on to their wallets,” said Mr. Reinsch.
The legislation has already shaken up the auto industry. Immediately after President Biden signed the bill into law in August, a provision excluded from the tax credits any electric vehicle not made in the United States, Mexico or Canada.
Hyundai and Kia cars made in South Korea no longer qualified, angering that nation’s leaders, who felt betrayed by a close military and trading partner. Since then, sales of electric vehicles made in South Korea have lost market share in the United States.
The law also proved to be a major source of friction diplomatically. Leaders of the European Union, Japan and other US allies feared the program would drive investment away from their countries or force them to offer more generous subsidies to compete with the United States.
Because the European Union, Japan and Great Britain do not have free trade agreements with the United States, products from those countries, including battery materials, were not eligible for any part of the tax credits.
Under pressure from foreign governments, the Biden administration proposed an alternative solution. In a press release, the Treasury Department said the law did not define the term “free trade agreement,” which “could include newly negotiated critical minerals 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 congressional lawmakers, who have said the administration failed to consult them on trade policy. Some lawmakers also argue that US taxpayer dollars will now subsidize Japanese industry.
Sen. Joe Manchin III of West Virginia, a key player in the writing and passage of the Inflation Reduction Act, said in a statement that the Treasury Department’s guidance “completely ignores the intent” of the law . He urged the White House to “stop it now, just follow the law.”
“It’s appalling 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 tax dollars should not be used to support manufacturing jobs overseas.”
It is not clear how many vehicles will be able to get credits under the new rules.
At least some Tesla vehicles are likely to remain eligible. The company manufactures cars in California and Texas and batteries in Nevada. General Motors can also qualify quickly because it has begun producing batteries in Ohio in a joint venture with LG Energy Solution.
Hybrid vehicles will qualify if they meet the other requirements and their batteries have a capacity of at least 7 kilowatt-hours.
Car manufacturers will have to certify whether their vehicles meet the component and mineral requirements. The Revenue Service will enforce the rules. Some vehicles may only qualify for 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 US trading partners such as Canada and Australia. Numerous companies are developing mines and building refineries.
Hyundai is building a factory in Georgia, which will allow the company’s cars to collect credits once production begins in 2025. Ford, Honda and many others are building battery plants in the United States.
And a loophole in the law allows companies to collect the credits if they rent vehicles to customers, even if the cars don’t meet the sourcing and manufacturing requirements. In effect, people who lease electric vehicles could benefit from the credits indirectly if automakers and car dealers pass the credit on to them by requiring smaller monthly payments.
Alan Rappeport provide reports
