The Biden administration unveiled a long-awaited proposed rule Friday that will make fewer electric vehicles eligible for $7,500 tax credits meant to encourage consumers to ditch gas-powered cars, an at least temporary crimp in the White House’s strategy to address climate change.
But senior administration officials who laid out the Treasury Department guidance implementing last year’s landmark climate law insisted that the setback will not last long, with more and more vehicles becoming eligible as the automotive industry familiarizes itself with the new system and brings manufacturing might online.
“The critical minerals and battery components requirements will reduce the number of electric vehicles currently eligible for the full credit in the short term, in order to create incentives to bring supply chains and manufacturing to the United States,” a senior Treasury official told reporters on a call Thursday.
“However, we believe these requirements will significantly increase the number of vehicles made and sold in the U.S. over the next decade as new investments and American production come online,” the official added.
The restrictions on the tax credits will take effect after the proposal is published in the Federal Register on April 17. But Treasury still plans to take comments on the guidance through June 16 to inform a final rule, getting feedback on issues like how to best distinguish processing of critical minerals and manufacturing of battery components.
The reshaping of this key tax credit was by design, as Sen. Joe Manchin, the key vote on the Inflation Reduction Act, inserted domestic sourcing requirements into the law.
This was meant to foster the development of U.S. industries that produce the minerals and components needed to build EV batteries and force the automotive industry to wean itself off a supply chain dominated by China.
Manchin has chafed at how Treasury has been interpreting the mandates, accusing the Biden administration Wednesday of allowing too many of an electric vehicle’s materials and components to be made outside North America, and threatened to take legal action (E&E Daily, March 30).
The West Virginia Democrat and chair of the Senate Energy and Natural Resources Committee on Friday again blasted the proposed guidance, saying it “completely ignores” the intent of the law and further cedes control of supply chains to China.
“It is horrific that the Administration continues to ignore the purpose of the law which is to bring manufacturing back to America and ensure we have reliable and secure supply chains,” Manchin said in a statement. “The guidance includes a 60 day comment period and I ask for every American to comment. My comment is simple: stop this now — just follow the law.”
The guidance hews close to a Treasury white paper released in December, which laid out a multiprong requirement for electric vehicles to obtain the full $7,500 federal tax credit.
Specifically, a car becomes eligible for half of the credit if at least 40 percent of the critical minerals in an EV battery are extracted or processed in the U.S. or a country that has as a free-trade agreement with the U.S, or recycled in North America. To receive the other half of the credit, 50 percent of EV battery components must be manufactured or assembled in North America.
Also, eligible EVs must have batteries that do not contain critical minerals extracted, processed or recycled by a “foreign entity of concern,” or contain components manufactured by those entities. That requirement kicks in for battery components in January and minerals the following year.
For months, U.S. allies have questioned whether their products could be included as free-trade partners as the restrictions are implemented.
The proposal largely sticks with the list of free-trade agreement countries announced in December, but also includes Japan. That follows an agreement earlier this week by Japanese and U.S. officials to permit the country to export key minerals to the U.S. duty-free (Greenwire, March 28).
Treasury said other countries could be added in the future — a likely reference to the European Union, which is now negotiating a similar agreement with the United States (E&E News PM, March 10).
But questions remain around what deals would be eligible for tax credits, which countries would be excluded, and how the new tax credit regime will be tracked and enforced.
The proposed rule, for example, doesn’t clarify what constitutes a “foreign entity of concern,” which senior administration officials said they’re working “expeditiously” to complete. As of January 2024, countries that land in that category will be barred from providing any battery components for vehicles getting tax breaks. Those restrictions will apply to minerals in 2025.
Senior administration officials said manufacturers will certify under penalty of perjury whether their vehicles are eligible. A Treasury official said the onus is on automakers to be truthful in reporting on the sources of their battery materials or face being barred from the tax credit system.
“The automakers have a great incentive to provide” accurate information or risk disqualification from the program, called the New Clean Vehicle Credit, the official said. The role of the IRS, they said, is to “work with industry to make sure they understand the rule.”
“We expect these automakers will provide us with the information because it’s to their benefit.” the official said.
Reporter David Ferris contributed.
Clarification: This story was updated after publication to clarify the timing of the “foreign entity of concern” requirement.