Automakers get more flexibility as US finalizes EV tax credit rules

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U.S. automakers are getting an electric vehicle supply chain reprieve after federal regulators last week finalized their guidance defining which vehicles qualify for a coveted $7,500 tax credit.

The Treasury Department and Energy Department made several changes in their final rules governing what defines a foreign entity of concern, and how the tax credit gets administered. Some of the key changes, such as adding graphite to a list of hard-to-trace minerals, promise to give automakers more time and flexibility to adjust their EV supply chain.

“The Treasury rules appear to recognize the realities of the global supply chain by providing some temporary flexibility in terms of where the critical minerals in EV batteries can be sourced,” John Bozzella, president and CEO of Alliance for Automotive Innovation, said in a statement reacting to the news. “That’s helpful as more automotive supply chains and battery production is localized to the U.S. and our allies.”

Automakers face strict conditions for tax credits

Of the 114 EV models currently for sale in the United States, only 22 models qualify for some of the tax credit, according to Bozzella. Of those, 13 models qualify for the full $7,500 credit.

The strict conditions have already spurred automakers, many of which are chasing EV sales and profitability, to make changes to their supply chain. In December, General Motors made sourcing changes after the Cadillac Lyriq and Chevrolet Blazer EV became ineligible for tax credits for using critical minerals sourced from China. 

The tax credits are part of the Inflation Reduction Act passed by Congress in 2022, and intend to spur the adoption of EVs in the U.S. while bolstering domestic manufacturing of batteries. 

However, in order for vehicles to qualify for the credit, a portion of the critical raw materials for batteries cannot be sourced from any foreign entity of concern,” as required by the Bipartisan Infrastructure Law.  This includes any entity that is “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation,” which includes China, Russia, Iran and North Korea.

Under the final rules, automakers must conduct a detailed review of their battery material supply chains to determine the percentage of critical materials for extraction, processing and recycling. However, manufacturers are permitted to exclude these battery materials figures from foreign entity of concern due diligence and related compliance determinations until 2027, according to the Treasury Department press release. 

Automakers must also demonstrate how they will comply with the foreign entity of concern restrictions in 2027 and beyond. The IRS and DOE will review documentation and certifications surrounding the sourcing of raw materials to ensure that automakers are accurately representing their battery contents. 

The final rules also address hard-to-trace battery materials. But automakers may temporarily exclude these materials until 2027, when tracing standards and methods are expected to improve. 

“Today’s actions from Treasury and DOE provide clarity and certainty to an EV marketplace that’s rapidly growing,” said John Podesta, Senior Advisor to the President for International Climate Policy, in a press release.

The ‘monumental task’ of shifting EV supply chains

Many global automakers currently rely on suppliers in China for battery materials, according to a July 2022 report from the Brookings Institute. China refined 68% of nickel, 40% of copper, 59% of lithium, and 73% of cobalt globally in 2021, which are all key materials for batteries. The country accounted for 77% of the world’s lithium-ion battery production in 2020, according to the report.

“The EV transition requires nothing short of a complete transformation of the U.S. industrial base,” Bozzella said. “That’s a monumental task that won’t – and can’t – happen overnight.”

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