Image for Sourcing Requirements May Limit EV Tax Credit
The Inflation Reduction Act provides generous tax credits for the purchase or lease of electric vehicles. At the same time, the legislation ties those tax credits to content requirements for automakers who must domestically produce batteries using minerals mined or recycled in North America. Automakers say that could make tax credits unattainable until they can ramp up battery production and mine domestic sources of lithium, cobalt and rare earth minerals.

Automakers Pushed to Mine Materials to Make Batteries

Climate action provisions of the budget reconciliation measure that the House is expected to approve this week offer a tax credit when you purchase an electric vehicle. To get the full tax credit, the vehicle’s batteries must be manufactured domestically using minerals mined or recycled in North America. Automakers warn they cannot meet that standard now, which could limit the utility of the tax credit for EV purchasers.

Lawmakers intended the tax credit to convince consumers to buy electric vehicles as well as to encourage US automakers to create a domestic EV supply chain ranging from mining necessary minerals to manufacturing batteries. However, motorists may be motivated to buy electric vehicles before automakers can meet the content requirements to qualify purchasers for the full $7,500 tax credit.

The new EV vehicle tax credit would become available in 2023. To qualify for the full tax credit, an EV’s batteries must contain at least 40 percent of minerals derived in North America. That requirement moves up to 80 percent in 2027. Vehicle price and purchaser income limits also apply. Motorists who buy a used electric vehicle qualify for a $4,000 tax credit.

John Bozzella, CEO of the Alliance for Automotive Innovation, estimates that 50 of the 72 electric, hydrogen or plug-in hybrid vehicles currently sold domestically would fail to qualify for the full tax credit provided in the Inflation Reduction Act. “The $7,500 credit might exist on paper, but no vehicles will qualify over the next few years” as qualifications become stricter, he said.

US-based automakers are investing huge sums to make batteries here. Ford is building a battery plant in Kentucky. General Motors has teamed up with appliance maker LG on a battery factory in Michigan. Hyundai has announced plans to build an EV and battery manufacturing plant in Georgia. Stella and Samsung are combining efforts on a similar plant in Indiana.

Building an assembly plant is not the same as making batteries from scratch. Most electric car batteries now come from China. It may be difficult to dislodge China’s dominant position quickly because of its access to some of the world’s richest veins of lithium and other minerals that go into batteries. The other large sources of lithium are in Chile and Australia. Attempts to mine lithium in the United States are already facing environmental pushback, as was the case in a potential mine in Southeast Oregon that was scrapped because of opposition.

China also possesses the world’s largest reserve of rare earth minerals that batteries require at 44 million megatons and is the global leader in production at 168,000 megatons. The United States has the sixth largest reserve at 1.8 million megatons, but its only operating mine located in California produces rare earths used primarily in medical devices and computer chips.

The world’s largest producer of cobalt, another essential component of batteries, is the Democratic Republic of Congo, one of the poorest nations in the world and deemed politically unstable. The next largest source is Russia. Canada is the eighth largest source.

Michigan Democratic Senator Debbie Stabenow said, “I went round and round with Senator [Joe] Manchin, who frankly didn’t support any credit of any kind. We’ll work through this and make this as good as we can for our automakers.” She attributed the content requirements to qualify for the tax credit to “people who don’t understand that manufacturers can’t simply flip a switch and create a North American supply chain”.

Manchin defended the content requirements by saying he wants automakers to “get aggressive and make sure we’re extracting in North America, processing in North America and we put a line on China. I don’t believe we should be building a transportation mode on the backs of foreign supply chains.” A representative from the National Mining Association praised the content requirements for EV batteries. “Doing that directly supports high-paying jobs here and enhances our global competitiveness.”

People who wrote in the content requirements for the EV tax credit don’t understand that manufacturers can’t simply flip a switch and create a North American supply chain.

Stabenow pledged to work with the Biden administration to make the newly approved tax credits as flexible as possible while rules are written to conform with legislative intent. She also said General Motors, Tesla and Toyota will no longer be subject to EV tax credit caps imposed by previous legislation. The caps denied some purchasers any tax credit.

This report relied heavily on a story report by The Associated Press and published by The Oregonian