Will New Law Hinder Electric Vehicle Uptake in the US?

It is great to see the US rejoining the majority of the world in the fight against climate change. However, sometimes changes that are made with the best of intentions turn out to have different outcomes than anticipated. This might turn out to be the case with some aspects of President Biden’s signature Inflation Reduction Act (IRA), which was signed into law this week. There’s no doubt that the intentions behind the act are laudable in attempting to reduce the damage done to the environment, but in some cases it could do more harm than good. The IRA has many of the provisions that Biden originally campaigned on as part of his Build Back Better promise. However, due to negotiations, a lot of the agenda has been dropped, diluted and changed since it was originally proposed. And those changes, especially the the proposals to encourage electric vehicle adoption, may have the opposite effect.

Part of the legislation provides for a tax credit on the purchase of new electric vehicles. In previous legislation, electric vehicles were subsidized without restrictive preconditions. However, the new IRA bill tries to combine the adoption of electric vehicles with another of Biden’s priorities, promoting American industry. As such, the subsidies are tied to rules about the proportion of the battery constructed in the US, and also the amount of raw materials. On the face of it, that is a sensible move that is intended to bring jobs back from abroad and safeguard important industries. However, in this case, the rules appear so strict that some news sources have claimed that no vehicle in production at the moment would qualify for the discounts.

The new tax credit only applies to sedans with a voucher price of under $55,000 and other electric vehicles under $80,000, excluding many models out of the subsidy from the start. Half of the $7500 tax credit is tied to the originating country of the battery and the other half is tied to its supply chain. It is thought that none of the batteries currently used in electric vehicles sold in the US would qualify. That may change in the future as lithium mines come online and new battery plants are opened. At the moment, the law states that 40 percent of the critical chemicals that go into battery cells must be extracted and processed in the US, or official trading partners. That percentage will rise by 10 percent each year until 2029, when 100% of batteries should be made in the US. The problem is that batteries with materials that “were extracted, processed, or recycled by a foreign entity of concern,” are ineligible for the tax credit. China is listed as a “foreign entity of concern” by the federal government, and the country is currently responsible for over three quarters of the battery market.

As with any new laws, how the details of how the laws are implemented will be important. In this case it will be up to the Secretary of the Treasury to interpret the act. At the moment, even manufacturers are unclear if their vehicles will qualify. For example, Volkswagen has emailed its customers saying that it cannot guarantee that its 2022 and 2023 ID.4s models will meet the new requirements, and the company advises those customers to enter into a written agreement to purchase before the law comes into effect to receive the older tax credit before it is replaced. Hopefully the interpretation of the law is pretty lax, especially to begin with. The US already lags much of Europe in electric vehicle adoption, and it would be a shame if legislation that was meant to assist in the uptake, actually deterred new purchases.