Climate bill could bypass tax credits for electric vehicles, making eligibility nearly impossible

The U.S. Senate passed a sweeping Climate, Energy, and Health Care Bill on August 7, 2022, which invests an unprecedented $370 billion in energy and climate programs over the past few years. next 10 years, including incentives to develop renewable energy and electric vehicles.

Rapid and widespread adoption of electric vehicles will be essential for the United States to meet its climate goals. And the new bill, which includes a host of other health and tax-related provisions, aims to encourage people to trade in their gas-powered cars for electric ones by offering a tax credit of up to $7,500. for new electric vehicles and up to $4,000 for used vehicles. electric vehicles until 2032.

But there’s a catch, and it could end up making it difficult for most EVs to qualify for the new incentive.

The bill, which must be approved by the House, requires new electric vehicles to meet strict sourcing requirements for critical materials, battery components and final assembly to qualify for the tax credits. While some automakers, like Tesla and GM, have well-developed domestic supply chains, no electric vehicle maker currently meets all of the bill’s requirements.

Building a Home EV Supply Chain

At first glance, the revised electric vehicle tax credits seem like a smart move.

Current US policy allows credits for the first 200,000 electric vehicles sold by a manufacturer. These credits have helped boost demand for electric vehicles. But industry leaders including Tesla and GM have already hit that cap, while most vehicles from foreign automakers are still eligible. The bill would eliminate the cap for individual automakers and extend the tax credits to 2032 – for any vehicle that meets the supply requirements.

Currently, China dominates the global supply chain for materials and lithium-ion batteries used in electric vehicles. It is not a coincidence. Since the early 2000s, Chinese policymakers have adopted aggressive policies that have supported advanced battery technologies, including investment in mining, materials processing and manufacturing. I discuss how China has taken a head start in the race towards a clean energy future in my new book, Charged: A History of Batteries and Lessons for a Clean Energy Future.

Sen. Joe Manchin, the West Virginia Democrat who blocked earlier efforts to pass the measures through the sharply divided Senate, said he hopes the requirements will help strengthen the states’ supply chain of critical minerals. -United.

The electric vehicle incentives would complement other U.S. policies aimed at reviving domestic electric vehicle manufacturing capacity. These include $7 billion in grants to accelerate battery supply chain development allocated in the Infrastructure Investment and Jobs Act of 2021 and a $3 billion expansion of the loans for the manufacture of advanced vehicles included in the current bill, officially known as the Inflation Reduction Act. .

The problem is that the Inflation Reduction Act supply requirements are coming online so quickly, starting in 2023, and growing so rapidly that the plan could backfire. Instead of expanding EV adoption, the policy could make nearly all EVs ineligible for tax incentives.

Even Tesla’s Gigafactory is counting on China

The bill excludes incentives for any new vehicle that contains battery materials or components mined, processed, manufactured or assembled by a “foreign entity of concern” – a category that includes China.

According to Benchmark Intelligence, a market research firm that tracks the battery industry, China currently controls 81% of global cathode manufacturing capacity, 91% of global anode capacity and 79% of global capacity. manufacturing lithium-ion batteries. By comparison, the United States has 0.16% of cathode manufacturing capacity, 0.27% of anode manufacturing capacity, and 5.5% of lithium-ion battery manufacturing capacity.

Even the most advanced battery factories in the United States, such as Tesla’s Nevada Gigafactory, currently depend on materials processed in China. Despite Ford’s plans to expand its domestic supply chain, its most recent deals relate to the supply of batteries from Chinese manufacturer CATL.

In addition to excluding materials and components from China starting in 2023, the bill also requires that a minimum percentage of battery materials and components come from domestic sources or from countries with which the United States has entered into an agreement. fair trade agreement, such as Australia and Chile. The threshold starts at 40% of the critical minerals value in 2023 and climbs to 80% in 2027, with similar requirements for battery components.

If a manufacturer does not meet these requirements, their vehicle will not be eligible for the tax credit. Whether the Treasury Department will offer exemptions remains to be seen.

Although electric vehicle manufacturers are already pursuing plans to develop supply chains that meet these supply requirements, mine and processing facility proposals often face challenges. Indigenous and environmental concerns have slowed a proposed lithium mine in Nevada. In some cases, key materials, such as cobalt and graphite, are not readily purchased domestically or from fair trade allies.

The proposed recycling projects could help meet the demand. Redwood Materials projects that its recycling facility, currently under construction in Nevada, will provide cathode and anode materials to support one million electric vehicles per year by 2025. Despite these optimistic projections, experts predict that recycling will not can play only a small role in offsetting the demand for raw materials needed to expand the adoption of electric vehicles over the next decade.

How much can the bill do to reduce emissions?

Proponents of clean energy called the bill historic. In addition to massive investment in renewable energy and electric vehicles, it supports technologies such as carbon capture and storage and carbon-free fuels, and includes a levy to reduce methane emissions, as well as certain trade-offs. that drive fossil fuels. .

Forecasters have projected that the overall climate package could help put the US on track to cut greenhouse gas emissions about 40% by 2030 from 2005 levels – still below the Biden administration’s goal of a 50% reduction, but closer.

But for the United States to meet these goals, electric vehicles will have to replace fossil-fuel vehicles by the millions. A realistic electric vehicle tax credit that allows manufacturers time to diversify their supply chains and makes these vehicles more affordable for all Americans will be crucial. The proposed policy risks bypassing tax credits for electric vehicles when they are most needed.

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