Uncertainty abounds as EV tax credit guidance looms

By Timothy Cama, Hannah Northey | 03/07/2023 01:29 PM EST

The Treasury Department is expected to issue guidance later this month on sourcing requirements for electric vehicle parts.

The Treasury Building is viewed in Washington.

The Treasury Department is working on guidance on the Inflation Reduction Act's electric vehicle incentives. Patrick Semansky/AP Photo

Electric vehicle buyers and makers, as well as mining companies, are eagerly anticipating the Biden administration’s expected announcement this month on which vehicles can get credits worth up to $7,500 under last year’s climate law.

At issue is how the Treasury Department will enforce and interpret provisions in the Inflation Reduction Act that could restrict the credits to certain vehicles. The law has specific sourcing requirements for battery minerals and battery components; the department said in December that it would issue the new guidance this month.

It’s a hugely consequential set of decisions for Treasury, as the administration tries to balance the goals of keeping EV prices down while incentivizing manufacturing and mining in the United States and in allied countries. Only small parts of the EV supply chain are domestic, but numerous companies have announced new U.S. initiatives in recent months in the hopes of benefiting from the Inflation Reduction Act.


A key question is how Treasury will structure a transition period for automakers, players in the battery supply chain and mining companies to meet the full requirements. The department said it intends to work out a transition to give companies time to ramp up their supply chains before the full requirements take effect, within the bounds of the law.

Mining companies and EV battery makers, on the other hand, have pushed Treasury to quickly impose sourcing requirements to bolster domestic production and processing of battery minerals as the credits are doled out.

“The most important thing to remember is this is about congressional intent. And that was to get as many EVs on the road as possible and the charging network to support them,” said Thomas Boylan, regulatory director of the Zero Emission Transportation Association, which represents automakers and mineral companies among others involved in the EV industry.

“What we want to see are rules that are achievable, that ensure that we in the industry and the government get the most out of these tax credits.”

Jim Sims, vice president of external affairs for NioCorp Developments Ltd., which is pursuing a rare earths mine in Nebraska, said Congress laid down aggressive markers for manufacturers and that challenges extend beyond mining and mineral processing.

“The U.S. government has to continue to look at encouraging the build-out of entire mine-to-showroom-floor supply chains here in the U.S.,” said Sims.

Those aggressive markers came from Senate Energy and Natural Resources Chair Joe Manchin (D-W.Va.), a longtime critic of EV tax credits. His goal in writing the Inflation Reduction Act was to spur a shift of EV supply chains away from China and toward North America. His main concern, he said, is national security.

“Right now, we’re about ready to put our whole eggs in one basket, thinking EVs are the way to go, and we’re going to be absolutely so taken advantage of, to the point to where we’re going to be held hostage by the foreign supply chain that China has a grip on,” he said last year (Energywire, June 23, 2022).

Sen. Martin Heinrich (D-N.M.) told E&E News he hopes Treasury can spur growth of the United States’ supply chains.

“We’re going to be in a situation where we need to both scale up these industries — and certainly, EVs is one of those things — while at the same time recognizing that right now, we don’t have the supply chain in this country,” he said.

“The IRA was designed to build that,” he added. “And hopefully, they just provide very clear guidance as to what’s in and what’s out, because ambiguity and uncertainty, those are things that tend to freeze investment.”

Strict requirements

Senator Joe Manchin entering the U.S. Capitol.
Sen. Joe Manchin (D-W.Va.) at the Capitol. | Francis Chung/POLITICO

While Treasury will provide granular details of how it will carry out the requirements, the law itself dictates the basic standards.

A buyer can get up to $3,750 of the $7,500 credit if at least 40 percent of the car’s critical minerals like lithium and cobalt, as measured by value, were extracted or processed in North America or a country with which the United States has a free-trade agreement. If the minerals are recycled, that process would have to happen in North America.

The mineral requirement rises through the following years, until it reaches 80 percent in 2027.

To get the remaining credit worth up to $3,750, at least 50 percent of a car’s battery components must be manufactured in North America, a level that also increases in the following years until hitting 100 percent in 2029.

Those requirements, which won’t take effect until the final guidance is released, are on top of the mandate that the vehicles’ final assembly must take place in North America to get the credits, as well as limitations on the vehicles’ prices and the buyers’ income. Those provisions took effect at the beginning of the year.

Starting next year, cars can’t get the credit if battery components are from “foreign entities of concern,” a provision meant to apply to entities including terrorist groups and major U.S. adversaries. The “foreign entities of concern” ban will apply to key battery minerals in 2025.

Treasury’s implementation of the credit has been rocky. The guidance was due in December, but the agency instead punted it to March and waived the battery rules altogether in the meantime. It also allowed leased EVs to get the credit regardless of their sourcing, since the law exempts vehicles used for commercial purposes.

Manchin was incensed by that guidance and accused Treasury of not following the law. He introduced legislation with Republican Sen. Mike Braun of Indiana that would have stopped the credit until Treasury writes its full guidance, but Sen. Debbie Stabenow (D-Mich.) blocked fast-track passage of that measure (E&E Daily, Jan. 27).

A host of questions

The major remaining questions for Treasury to answer in its guidance revolve around how it will define what constitutes a free-trade agreement, how it will enforce the prohibition on tax credits for materials made by “foreign entities of concern” and how companies will document their compliance with the rules.

“Those are the things where Treasury has the leeway to really make a difference in how this tax credit rolls out more EVs or fewer,” Boylan said.

The U.S. mining sector has largely sided with Manchin in favor of stringent standards.

“Incentives are not giveaways — they are intended to incentivize action, and the regular announcements of new supplier agreements between miners and the manufacturers show that these incentives are working as intended, are creating U.S. jobs and more secure supply chains, and should be implemented as proposed,” National Mining Association President Rich Nolan said in a statement on Manchin’s legislation.

But mining companies and EV battery makers are also cautioning Treasury to clarify in guidance how the tax credits will be doled out to avoid countries like China from finding loopholes. For example, the Battery Materials and Technology Coalition, which includes companies that mine, process, manufacture and recycle battery materials, called on Treasury in comments last fall to more accurately define components of “clean” vehicle battery to avoid loopholes.

“A stringent and detailed approach to this definition is necessary to best support domestic battery component manufacturing, and to prohibit foreign entities of concern from benefiting from the credit,” the group told Treasury.

The EV rules have also caused international trade headaches. Foreign countries, particularly in Europe and Asia, have accused the United States of unfairly discriminating against their imported vehicles and minerals and are calling for liberal sourcing standards. Manchin has countered that the Inflation Reduction Act’s incentives don’t preclude European countries from building facilities in the United States (E&E News PM, Feb. 7).