Biden Administration's Push to Reduce China Reliance May Hinder EV Tax Credits

President Joe Biden's aim of having half of all new passenger vehicles sold in the United States run on electricity by 2030 may be hampered by new restrictions that were announced on Friday. Americans may find it more difficult to locate electric automobiles that qualify for a full $7,500 federal tax credit.

According to plans unveiled by the Treasury and Energy departments, electric vehicle (EV) customers would not be able to collect the full tax credit if they bought vehicles that used battery components from China or other nations deemed unfriendly to the US.

In an attempt to accomplish his target of halving greenhouse gas emissions that warm the world cut by half by 2030, Biden is seeking to boost sales of electric vehicles, but the new regulations, mandated by his hallmark climate bill, which was adopted last year, are likely to hold down public adoption of these vehicles. Although EV sales have tripled since Biden became office, the United States continues to rely heavily on imports, particularly from China, for many of the essential materials required to make EV batteries.

The Biden administration has not yet released any lists, so it is still unclear which automobiles would qualify for the full $7,500 tax credit under the new scheme.

The Inflation Reduction Act, which Congress passed, contains language that prevents electric cars from receiving the full tax break if essential minerals or other battery components were produced by a "foreign entity of concern." The law defines this as any company that is owned, controlled, or governed by North Korea, China, Russia, or Iran, though China is the primary target.

The auto industry, according to administration officials, has long been aware of the impending regulations and has taken action to establish auto supply chains in the United States and set itself apart from China, which has long dominated the production and processing of minerals used in EV batteries, such as lithium and graphite.

Shaping Electric Vehicle Policies and Clarity in U.S. Auto-Supply Chains

The new tax credit regulations, according to the White House, should promote the growth of auto-supply chains in the United States.

Deputy Treasury Secretary Wally Adeyemo informed reporters this week that automakers have already adapted their supply chains to ensure buyers qualify for electric vehicle credits. Adeyemo noted that these adjustments require time, but companies are actively making the necessary investments, and consumers are actively purchasing electric vehicles.

Car companies, like General Motors and Hyundai, are rushing to construct U.S. plants to create batteries and process resources like lithium in response to the climate law. However, it will still take years before they can manufacture an electric car without importing parts and supplies from China.

Following months of ambiguity about how rigidly the administration will interpret laws on foreign enterprises of concern, or FEOCs as they are frequently known, Adeyemo and other officials stated that the guidelines are meant to offer clarity.

Deputy Energy Secretary David Turk emphasized the pursuit of clarity with manufacturers, particularly as they make substantial investments in electric vehicles. Turk highlighted the importance of clear guidelines for the future growth of the crucial electric vehicle industry.

Impact of New Rules on Electric Vehicle Tax Credits

When the new rules go into force next year, many EVs that are currently qualified for the full $7,500 tax credit might see that amount cut in half, predicts Sam Abuelsamid, a mobility expert with Guidehouse Insights.

According to him, automakers should be able to meet the criteria that 60% of battery parts be sourced from North America in order to be eligible for a $3,750 tax credit in 2019. However, they will likely lose $3,750 of the credit as it will be much more difficult for them to obtain batteries that include half of their essential materials from the United States or nations with which it has free trade agreements.

According to the Treasury Department, starting in 2024, no battery component made in a foreign country of concern may be found in an eligible clean car. For a clean car to be eligible for a tax credit, it must include any key minerals that were harvested, processed, or recycled by a foreign business of concern starting in 2025.