New US rules, aimed at curbing China, could make it harder for EV buyers to claim a full tax credit

WASHINGTON — Americans could have a harder time finding electric vehicles that qualify for a full $7,500 federal tax credit under new rules proposed Friday, which are likely to hinder President Joe Biden's goal of half of new passenger cars sold in the US will be sold on electricity by 2030.

Plans from the Treasury and Energy departments would prevent EV buyers from claiming the full tax credit if they buy cars that contain battery materials from China and other countries considered hostile to the United States.

The new rules, required under Biden's climate law passed last year, are likely to slow consumer adoption of electric vehicles just as Biden tries to ramp up sales to meet his goal of cutting planet-warming greenhouse gas emissions to be reduced by half by 2030. Electric vehicle sales have tripled since Biden took office, but the US is still dependent on foreign sources, especially China, for many of the essential minerals needed to produce EV batteries.

It's still not clear which vehicles will qualify for the full $7,500 tax credit under the new plan because the Biden administration has not yet released any lists.

Congress included language in the Inflation Reduction Act that prohibits electric cars from qualifying for the full tax credit if critical minerals or other battery components are made by a “foreign entity of concern.” The law defines this as any company owned, controlled or subject to the jurisdiction of North Korea, China, Russia or Iran, although the main target is China.

Administration officials said the auto industry has long been aware of the coming rules and has taken steps to develop U.S. auto supply chains and distance the industry from China, which has long focused on mineral production and processing such as lithium and graphite has dominated. EV batteries.

The White House hopes the new tax credit rules will spur the development of auto supply chains in the US

“Automakers have already adjusted the supply chain to ensure buyers qualify for these credits and continue to do so,” Deputy Finance Minister Wally Adeyemo told reporters this week. “These changes take time, but companies are making the investments and Americans are buying these cars.”

Spurred by the climate law, automakers like General Motors and Hyundai are rushing to build U.S. factories to produce batteries and process materials like lithium. But it will still take years before they can produce an electric vehicle without materials and components from China.

Adeyemo and other officials said the rules are intended to provide clarity after months of uncertainty over how strictly the government would interpret the rules for foreign entities of concern, known as FEOC.

“Clarity is exactly what we are looking for, especially from manufacturers as they make major investments in electric vehicles that are essential to the future growth of this important industry,” said Deputy Energy Minister David Turk.

When asked how many cars that now qualify for tax credits will lose some or all of the credit next year, Adeyemo said the car companies themselves “will determine which ones qualify” through their actions.

“These are advanced players,” Turk added, referring to the auto industry. Ford, GM and other U.S. companies “are already moving” to boost U.S. supplies of batteries and critical minerals and will take further steps to comply in the coming months, Turk said.

John Bozzella, president and CEO of the Alliance for Automotive Innovation, a trade group representing major automakers, said the transition to electric vehicles will require “nothing less than a complete transformation of the American industrial base. It's a monumental task that won't happen overnight. ''

The Treasury's guidance “recognizes the complexity of this task and the challenges faced by automakers, with a good balance. Day One Judgment: Clarity for automakers. Finally,” he said in a statement Friday.

Sam Abuelsamid, a mobility analyst at Guidehouse Insights, expects that many electric vehicles that now qualify for the full $7,500 tax credit will see that discount cut in half next year when the new regulations take effect.

Automakers can likely meet the requirement that 60% of battery parts come from North America next year to qualify for a $3,750 tax credit, he said. But it will be much harder for them to source batteries containing half of their essential minerals from the US or countries with which the country has a free trade agreement, and they are likely to lose $3,750 of the credit.

From 2024, a qualifying clean vehicle may not contain battery components manufactured by a foreign entity of interest, the Treasury Department said. From 2025, clean vehicles must not contain critical minerals extracted, processed or recycled by a foreign entity to qualify for a tax credit.

As a result, 2024 and 2025 are likely to be difficult years for automakers to meet battery capacity requirements, Abuelsamid and other analysts said. China is currently responsible for about three-quarters of the world's cathode and lithium-ion battery cell production, and more than 90% of anode production.

To ensure the appropriations can continue as the rulemaking process moves forward, the proposed rules would provide a transition period for electric vehicles put into service after Jan. 1, the Treasury Department said.

While smaller tax credits and high interest rates could hurt electric vehicle sales, a new rule allowing tax credits to be applied at the time of sale could offset those problems, Abuelsamid said. If you get the tax credit up front, instead of waiting until you file your tax return next year, “your monthly payment will actually decrease, which is a major stumbling block for consumers,” he said.

Customers can also lease an EV and get the full tax benefit, as they are classified by law as commercial vehicles exempt from North American manufacturing and battery requirements.

Sen. Joe Manchin, D-W.Va., said the new rules don't go far enough to prevent Chinese-made batteries from receiving U.S. tax breaks.

Manchin, chairman of the Senate Energy and Natural Resources Committee, was a key author of the provision banning the full tax credit if battery components are manufactured or assembled by a political opponent such as China. He denounced the new rules as an “illegal” attempt to circumvent the “made in America” ​​provisions of the climate law.

“I don't understand why President Biden is now allowing his administration to route our vital supply chains through China,” Manchin said, adding that he would move to undo the battery rules through the Congressional Review Act if the regulations are not overhauled.

A spokesperson for the National Mining Association welcomed the new rules as “an important step forward” to tackle China's dominance in EV supply chains, but said more needs to be done to ensure safe and reliable mineral supply chains in the build USA.

“We simply need a lot more domestic mining and processing. We cannot create safe, responsible supply chains if we do not approve domestic mines,” spokesman Conor Bernstein said.

The complexity of the rules is evident in the controversy over Ford Motor Co.'s plans. to build a factory in Michigan that would employ about 1,700 people to make batteries for new and existing electric vehicles. Ford says a wholly owned subsidiary would own the plant and hire the workers. But China's Contemporary Amperex Technology Co. Limited, or CATL, known for its expertise in lithium iron phosphate, would provide technology, certain equipment and employees.

Administration officials declined to say whether batteries from the Ford plant would qualify for tax breaks.

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AP Auto Writer Tom Krisher in Detroit contributed to this report.