Battery supply advice could significantly reduce electric vehicle tax credits

U.S. Treasury Department guidance on battery supply requirements for electric vehicle tax credits will result in fewer vehicles qualifying for full or partial credits, Reuters reports, citing an unnamed U.S. official.

Proposed electric vehicle credit guidelines included in the Cut Inflation Act state that for vehicles to qualify for $3,750, which is half of the total credit, 50% of the value of the components of the battery must be produced or assembled in North America. To get the rest of the credit, 40% of critical minerals must come from the United States or a country with which it has a free trade agreement.

The battery supply guidelines were set to go into effect Jan. 1, 2023, but in December the Treasury Department decided to suspend until March to give some electric vehicle makers a grace period to meet the requirements.

The Treasury Department is expected to share its guidance on Friday, and while the Reuters report doesn’t specify exactly what that will be, we can guess the full guidance will go into effect, meaning many EVs will lose credits. taxes or will see them cut. The Treasury Department should also define key terms such as processing, mining, recycling, and free trade agreements.

The battery supply rules are intended to help the United States reduce its dependence on China for batteries. While most automakers have revamped supply chains and put more processes in place since COVID, not all will have had the opportunity to fully upgrade their battery supply in time to meet both the Treasury Department requirements and increased demand for electric vehicles.

China currently manufactures 81% of the world’s cathodes, 91% of the world’s anodes and 79% of the world’s lithium-ion battery production capacity, according to data from Benchmark Mineral Intelligence, a market research firm. For comparison, the United States has only 0.16%, 0.27% and 5.5% market share, respectively.

Although the United States and most of its free trade agreement partners are terribly behind China, the Biden administration has said it believes that over time the tax credit will lead to the selling more electric vehicles as automakers reorganized supply chains to comply with IRA rules, the source told Reuters.

In February, the Treasury Department updated the vehicle classification standard to redefine what makes a vehicle a sedan, SUV, crossover or station wagon. The change made more Tesla, Ford, General Motors and Volkswagen electric vehicles eligible for tax credits of up to $7,500. These vehicles may lose some or all of the tax credits once the battery supply guidelines are released.