The Inflation Reduction Act of 2022 approved by the US Senate now moves to the House of Representatives, where it is anticipated to be easily approved.
Numerous tax law amendments are included in it, many of which aim to mitigate the worst effects of climate change.
A change to the current tax incentive for new plug-in electric vehicles is one of them. The tax credit will only be available for sedans that cost less than $55,000 and other EVs that cost less than $80,000, as explained last week, and the IRA sets income limitations for the credit. The tax credit cap of 200,000 vehicles per OEM is also removed by the bill, which is advantageous to both General Motors and Tesla.
It will, at the very least, if the majority of the materials used to make their EV batteries were harvested and processed in North America or another nation with which it has a free trade agreement. Now, instead of being determined by battery capacity, half of the credit ($3,750) is determined by the manufacturing location of the pack, and the other half by the supply chain. And if you want to buy an EV in 2023, that will be an issue.
North American automakers and battery manufacturers are beginning to construct plants. Ford and Volkswagen use SK cells produced in Georgia, while GM and LG Chem are also developing batteries in Ohio. Tesla is also producing batteries at a plant in Nevada. Ford and SK are developing plants in Kentucky and Tennessee, to mention a couple. Stellantis and Volkswagen are also planning US battery plants, among others. Consequently, depending on how the value of the battery is calculated, certain EVs may be eligible for at least half of the full $7,500 credit.
It’s impossible to say for sure which EVs will be eligible for at least $3,750 without more information, but the list may include Ford EVs that utilize Georgian-sourced cells, locally made Volkswagen ID.4s, GM EVs that use its new Ultium cells, and Tesla EVs that use Nevada-sourced cells.
But the other half of the credit is perhaps easier to understand. Even if these homegrown battery factories raise the proportion of batteries made in the US, at least 40% of the essential chemicals for those cells must be extracted and processed locally, and that percentage will rise by 10% annually.
Currently, North America lacks the capacity to manage that supply; nearly all of the world’s graphite, a large portion of its cobalt, and about two thirds of its lithium are processed in China.
One domestic source of battery components will come from domestic recycling of lithium-ion batteries, and the US has untapped lithium reserves. Although automakers like GM were already attempting to source as much as they could domestically, their options may be limited by the global race to win production contracts.
The Secretary of the Treasury will be responsible for providing clarification on how the new regulations will be applied after President Biden has signed the bill into law. That includes the manufacturing value of a battery and how one’s revenue will be calculated in the event of a point-of-sale refund.
There is no grace time after the guidance is published; that must occur no later than the end of 2022. However, the existing tax credit should still apply if you have a legally binding contract to buy a new EV by the time the bill is passed but it hasn’t been delivered.