The Biden administration on Friday released guidance that it hopes will alter the landscape for electric vehicles by pivoting the nation from gas-guzzling cars and bolster its aggressive climate goals.
But major questions remain around exactly how the new tax regime will keep out China-linked cars, components and minerals; whether and how the federal government can enforce the law; whether industry can scale up fast enough; and how many EVs will qualify for the $7,500-per-vehicle credit under last year’s landmark Inflation Reduction Act.
The Treasury Department proposed rule laid out details for how the Inflation Reduction Act should be implemented. The guidance hews closely to a Treasury white paper released in December that established a multipronged requirement for electric vehicles to obtain the full $7,500 federal tax credit (Greenwire, March 31).
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 United States or in a country that has a free-trade agreement with the United States, or are 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. Eligible cars cannot contain battery components from “foreign entities of concern” starting in January, a rule that kicks in for minerals the following year.
Here’s a look at the big questions facing the EV, mining and battery sectors:
How fast can industry scale up?
While the Treasury guidance is slated to boost domestic mining — along with lucrative manufacturing tax credits — senior administration officials made clear that their broader overarching goal is to both “reshore” and “friend-shore” supply chains. That includes processing critical minerals like cobalt, lithium and nickel needed for EV batteries.
Senior administration officials on a call with reporters Thursday said the credits could incentivize countries like Australia, the world’s biggest lithium producer, to send their minerals to Japan or the United States — not China — for processing. As it stands, China has a vice grip on processing the world’s minerals.
Officials said they’re already seeing the effects of the Inflation Reduction Act, including Albemarle’s plans to build a $1.3 billion lithium processing plant in South Carolina.
But Ian Lange, director of the mineral and energy economics program at the Colorado School of Mines, said it could take up to a decade to permit and build processing plants that can be controversial and threaten nearby communities with pollution.
Until then, demand will continue to grow for minerals from mining-heavy countries like Australia and Canada, which permit mines at a faster clip and have high environmental and social standards, he said. While the United States has minerals, Lange noted that permitting remains an obstacle and that nations like Japan and the European Union are expected to largely consume materials, not ramp up production.
“The tax credit for EVs doesn’t change things that have been issues for the past 10, 15 years,” he said.
There was also no shortage of questions among automakers, who responded to the question that matters most to them — which vehicles qualify for the credit? — with something between a shrug and a thumbs-down.
“I don’t know. It’s not a question that can be answered today,” wrote John Bozzella, CEO of the Alliance for Automotive Innovation, a trade group for automakers that manufacture in the United States.
Bozzella said his best guess is that fewer vehicles will qualify than the 21 that clear the bar right now, and that many of those that do will qualify only for half of the credit, or $3,750.
“March 2023 was as good as it gets” for the foreseeable future, Bozzella added.
Ford’s CEO, Jim Farley, put out a statement not naming which of its electric vehicles it thinks will qualify, but said, “We will help our customers determine whether they’re eligible to receive incentives.”
A Ford spokesperson said it was unclear if its massive new battery plant in Michigan, west of Detroit, called the BlueOval Battery Park, will qualify for the critical mineral portion of the credit when it starts operations in 2026.
With the new rules that take effect next month, the onus for determining which vehicles get tax credits shifts from the IRS to the automakers themselves.
They are responsible for examining the state of their critical mineral and battery assembly relationships and telling the government whether or not their vehicles qualify. If they misrepresent the truth, the IRS says, they can get kicked out of the tax incentive program.
How will the government enforce it?
Questions are also looming around exactly how Treasury will enforce its tax credit requirements and track materials moving all over the world, from mines to processing plants to battery assembly factories.
That’s partially because the agency punted on defining what constitutes a “foreign entity of concern.” The tax credits will become unavailable in the coming years whenever an electric car’s battery parts are supplied by companies that fall into that bucket.
The Inflation Reduction Act does not itself define a “foreign entity of concern,” but instead cites a definition contained in the 2021 bipartisan infrastructure law. Some legal experts have said the provision could be interpreted to exclude a swath of companies with a Chinese footprint (Energywire, March 24).
Lange with the Colorado School of Mines said it can be incredibly difficult to identify and track material dug up from mines that’s shipped around the world for processing or made into a purer form for use in things like EV batteries.
“It’s really hard to track these things,” he said. “It’s crazy to believe that we can track a given piece of dirt … it’s really hard to say, ‘I know this batch didn’t come from a Chinese company.’”
Ben Steinberg, who leads the Battery Materials and Technology Coalition, said it is possible to trace materials, and it’s already being done in sectors where materials change state. The coalition lobbies for North American mineral and battery companies.
“Traceability is being done now, particularly in the EV supply chain,” he said. “The more and more auto, battery, processing companies that enter into these systems, the easier and more applicable it will become because you’ll have a critical mass engaged, including the midstream chemical processors.”
Reporter Timothy Cama contributed.