The Long Road to American-Made Electric Vehicles

Much has been said about how the Inflation Act represents the largest US climate investment ever. But reading between the lines of the legislation, which deals with everything from taxes to health care, shows that the roughly $740 billion law has some caveats, including new provisions for an electric vehicle tax credit more than a decade ago.

For years, potential electric car buyers could count on a federal auto tax credit, which comes in at up to $7,500 for a deduction on a wide variety of electric car models. The incentive was originally approved in 2008 and played an important role in promoting electric car startups and encouraging price-conscious consumers to decide and switch to electric. The IRA extends the tax credit through 2032 and creates an additional $4,000 credit for used electric vehicles.

But there are new rules as well for a vehicle that qualifies for this credit. Final assembly of any eligible vehicles must be made in North America, and the balance will also depend on the size of the vehicle, its total cost, and the income of potential buyers. As of 2024, at least 40 percent of critical minerals and at least half of battery components used to build new eligible electric vehicles must come from the United States or one of its free trade partners to access full credit.

But for most consumers, a new tax credit may be out of reach. About 70 percent of electric, hydrogen, and hybrid vehicles currently sold in the United States will not qualify for the credit, according to the Automotive Innovation Alliance, a trade group that represents the auto industry. An August analysis of the IRA proposal from the Congressional Budget Office estimates that only about 11,000 vehicles could receive the credit in 2023, and about 60,000 vehicles in 2024, according to an August analysis of the IRA proposal. While the Internal Revenue Service is tasked with identifying eligible vehicles, experts told Recode they expect very few cars to receive credit over the next several years, especially as the law’s sourcing requirements are designed to become more stringent.

But that may not be the case forever. The tax credit is just one part of the Biden administration’s plan for a new era of American auto manufacturing, which includes everything from a fresh push to rethink mining regulations to the bipartisan Infrastructure Act’s $3 billion investment in the domestic battery supply chain. Combined, these efforts, and the sudden rise in new electric vehicle plants located in the United States, could make American-made electric vehicles more popular in the latter part of the decade. At the same time, this credit will not necessarily discourage people from buying electric vehicles made abroad, especially as electric vehicle prices fall and geopolitics continues to complicate the world’s access to fossil fuels.

“People will continue to buy electric vehicles that are not eligible for the tax credit,” explains Jen Nakano, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies. Electric vehicles have some real benefits for consumers. Not just for carbon removal. It’s the economic benefits to families and then, to some extent, the energy security benefits.”

Currently, China is the undisputed world leader in electric vehicles. Although the important metals used in electric car batteries are currently sourced from all over the world – the lion’s share of cobalt comes from the Democratic Republic of the Congo, while lithium mostly comes from South America and Australia – the material takes place in China. China is also responsible for more than 70 percent of global battery cell production. The country not only manufactures much of the world’s battery components, such as cathode materials, but is also home to the largest battery manufacturer, Contemporary Amperex Technology Co.

The overhauled car tax credit aims to catch up and compete by putting more pressure on automakers, even though they get one major piece of help. The previous version of the credit included a clause that after an automaker made 200,000 eligible cars, people could no longer claim the $7,500 credit. This means that companies like Tesla and GM have not been able to provide credit for some time. The latest version of the law removes this limitation, so car models made by major electric vehicle manufacturers can become eligible for credit again.

Auto manufacturers will have an uphill battle in meeting those requirements, especially since the percentage of components and materials that must come from the United States or its partners is designed to increase in the coming years. US reserves of minerals such as cobalt, lithium, and nickel are only a small part of the current global supply. Tougher rules will eventually kick in: By 2024, eligible vehicles cannot incorporate any battery components from China or “other foreign entities of interest,” and in 2025, they cannot include any significant metals from these countries either.

Explains Kathryn Steinken, vice president of policy for the Electrification Alliance, an organization that promotes the adoption of electric vehicles.

The United States was making progress on this front even before Biden signed the IRA earlier this month. Automakers and electronics manufacturers have been slowly adding to the number of battery production facilities in the United States over the past several years. Earlier this week, Honda and LG Energy Solutions announced they would build a $4 billion battery plant in the United States, with mass production expected in 2025. Panasonic, which said it would open a battery plant in Kansas last month, says it is It might build a second facility in Oklahoma. The Department of Energy estimated at the end of last year that at least 13 new giant factories could be coming to the United States, joining many already opened by companies like Tesla and General Motors.

These efforts are backed by the Biden administration’s other investments in the technology supply chain. The White House already allocated funding from the Bipartisan Infrastructure Act last year to support new projects focused on lithium production and critical metal recycling, and the Energy Department is lending billions to support the construction of new GM and LG Chem battery plants. The White House also supports an effort in Congress to reform the Mining Act of 1872, which still governs much of mining within the United States today. Biden declared key metals used in electric vehicles important to national security when he invoked the Defense Production Act in April, laying the groundwork for the Department of Defense to boost the domestic mining industry.

CHIPS and Science could give US-made electric vehicles a boost, too. The $52 billion support package, which Biden formally approved earlier this summer, will support the construction of several new semiconductor plants in the United States, including those focused on manufacturing auto chips. This is especially important for electric vehicles, which can easily require twice as many computer chips as similar internal combustion vehicles.

Nathan Ayer, a senior associate at RMI explains, “What the US is doing now is securing its own supply over the next 10 years, making sure that what is currently 0.7 percent of the global market rises to more than a reasonable amount, closer to 5, 6 , 10, 13 percent of the global market, to really make sure our demand is covered through supply chains.”

But Biden’s plan has some real flaws. Federal mining requests and approvals have declined over the past several years, environmental regulations may critically hamper the opening of new mining projects, the prospect of building or expanding new mines has led to the risk of pollution, potential damage to agriculture and wildlife, and disproportionate impacts on local communities. In Minnesota, members of tribes living nearby have already raised concerns about a mine from which Talon Metals, which won a contract with Tesla and praise from the Biden administration, plans to mine nickel for electric vehicles.

There are also logistical obstacles. The IRS needs to know how to accurately determine which models of electric vehicles meet the challenging supply requirements of the new credit, a task the tax agency is not currently equipped for. Other countries, including the European Union and South Korea, have suggested that the clean car tax credit could be unfair to foreign automakers and could violate international trade rules. It is also possible that automakers will accept a raise of $7,500 to completely avoid new government requirements.

These efforts are a reminder that although the United States has a long history of building cars, the country is mostly starting from scratch when it comes to electric vehicles. The Biden administration’s investments in largely electric vehicle manufacturing capabilities won’t produce components or vehicles for at least several years, meaning consumers may have to wait to reap the full benefits of the extended credit. Only time will tell if Biden’s dreams of an electric renaissance for the American auto industry will finally come to an end.

This story was first published in the Recode newsletter. Register here So you don’t miss the next!

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