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New guidance on the Inflation Reduction Act’s “foreign entities of concern” provision didn’t do much to clarify things.
If you’re in the market for a new car and considering cashing in on the $7,500 federal tax credit for an electric vehicle, I have good news. Also bad news.
The good news is, starting January 1, the credit will be a lot easier to claim. You won’t need to meet a certain level of tax liability to qualify or wait for your tax refund. You can transfer the credit to the dealership and take $7,500 off the sticker price right then and there.
The bad news is that suddenly, nobody knows which — if any — EVs will qualify. On Friday, the Biden administration proposed additional guidelines limiting where the components in eligible EVs are allowed to come from. Those guidelines won’t be finalized until early next year. But all signs indicate that the list of qualifying vehicles is set to shrink.
These changes aren’t coming out of nowhere — they’re part of the way the EV tax credit in the Inflation Reduction Act was designed. Over time, the law phases in additional rules that ask more of automakers in terms of onshoring their production and supply chains and minimizing their reliance on China. Beginning in 2024, if a vehicle contains any battery components that were manufactured or assembled by what’s known as a “foreign entity of concern,” it will no longer meet the requirements for the tax credit. Beginning in 2025, the same rule applies to vehicles containing critical minerals that were extracted or processed by a foreign entity of concern.
What, exactly, is a foreign entity of concern? Under U.S. law, the term applies to a company that is “owned by, controlled by, or subject to the jurisdiction or direction of” North Korea, Russia, Iran, or, yes, China. But what constitutes ownership or control is somewhat fuzzy.
“The implications are enormous because right now, it seems as if every battery that's going into an electric vehicle has some material ties to China,” Jay Turner, a professor of environmental studies at Wellesley College and author of a book on the history of batteries, told me.
In the proposal published Friday, the Biden administration recommended three criteria for interpreting the rule that it hopes will further strengthen American manufacturing of EV components and help diversify supply chains:
1. If the company producing the battery component or mineral is headquartered or incorporated in China, or if the relevant production activities occur in China, the vehicle will not qualify for an IRA tax credit.
2. If China has a 25% or more voting interest, board control, or equity interest in the company producing the component or mineral, the vehicle will not qualify.
3. If a company licenses or contracts with a Chinese firm, and the license entitles the Chinese firm to “exercise effective control” over production, the vehicle will not qualify.
This is a strict interpretation that’s likely to knock some vehicles off the eligibility list. But in a series of meetings with reporters on Wednesday, officials from the Department of the Treasury and Department of Energy said they didn’t know which or how many vehicles would be affected. “Part of the goal here is to put out this rule, and then the auto companies are going to come back to us,” said Wally Adeyomo, Deputy Secretary of the Treasury. “And then we will know which cars qualify.”
Automakers and EV experts have been anxiously awaiting guidance on the IRA’s foreign entities of concern provision. Adeyomo stressed that companies have been aware that these new rules would be coming ever since the law passed and have been making investments to ensure “that their cars would be able to qualify for this over the long term.”
Though it’s hard to fact check that claim, according to an EV supply chain database maintained by Turner and his students, at least 19 battery component factories have been announced in the U.S. and Canada since the passage of the IRA; none are yet operating, but automakers also have the option to buy components from U.S. trade partners. A report on the EV supply chain published by the International Energy Agency in 2022 notes that while China dominates cell component production, controlling 70% of capacity for cathodes and 85% of anodes, Japan and South Korea also had “considerable shares of the supply chain.”
Turner said it was conceivable that there will be models that qualify for the first phase of the rule beginning in January, which only applies to these battery components, but he was skeptical automakers would be able to continue qualifying in 2025, when the limits on critical minerals go into effect. “The further you get up the supply chain, the greater the exposure is to China,” he said. “It's not because China's got all of the critical minerals. It's that China has the processing facilities to turn those minerals into highly refined materials that are needed for the batteries.”
John Podesta, senior advisor to the president on clean energy innovation, said that Biden is “rewriting that story.” Officials pointed to a recent report from the Lawrence Berkeley National Laboratory, which found that the Salton Sea region in California has enough mineable lithium to support more than 375 million batteries for EVs. Turner’s database shows at least a dozen projects planned, rumored, or under construction to process minerals including lithium, cobalt, and graphite.
The guidance also raises questions about a $3.5 billion factory that Ford is building in Michigan to bring the production of safer, cheaper EV batteries to the U.S. The company is licensing technology from the Chinese company CATL, the world’s largest battery manufacturer, to produce batteries made of lithium, iron, and phosphate — which are more abundant than the cobalt and nickel used in the dominant batteries on the market. But the deal has come under scrutiny from House Republicans, who accuse CATL of having business ties to mining companies that use forced labor. Ford put construction on hold in September.
When asked about CATL, Deputy Secretary of Energy David Turk said the agency has not evaluated any individual company’s situation, but that they designed the licensing guidance to ”get at who has effective control in these kinds of situations.“
That could mean Ford is off the hook. Months ago, analysts told The Washington Post that the Chinese company will have little control over the Ford plant’s daily operations. “The way they structured this deal, they are keeping CATL at arm’s length as much as possible,” Sam Abuelsamid, head of e-mobility research at Guidehouse Insights, said.
The Biden administration is attempting to race forward on two sets of goals that are somewhat at odds with each other: speeding adoption of EVs while shifting their production away from China, thereby stimulating domestic industry and creating domestic jobs. When I spoke to Jane Nakano, a senior fellow at the Center for Strategic and International Studies, earlier this week, she said that if the Biden administration went with a strict 25% threshold for ownership, it could really accelerate automakers’ efforts to diversify sourcing away from China. “But that will take some time,” she added. “In the immediate future, many of the companies may simply try to compete without being able to access the consumer tax credit.”
Turner said that the question is not whether automakers can compete with low-cost EVs produced in China, but rather whether they can put out EVs that are cheaper than conventional cars on the market here.
“Once you get to the point that EVs are cheaper and we have a robust enough charging network that people aren't worried about running out of juice, I think that'll be the tipping point,” he said.
I should note that if you’re interested in this purely as a prospective consumer of an EV, the only thing you need to know is that your options to take advantage of the tax credit might be more limited come January. However, there is one weird trick to get around this and have a lot more options: Leasing. None of the rules around sourcing, assembly, or ownership apply to leased vehicles.
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Rob and Jesse break down China’s electricity generation with UC San Diego’s Michael Davidson.
China announced a new climate commitment under the Paris Agreement at last month’s United Nations General Assembly meeting, pledging to cut its emissions by 7% to 10% by 2035. Many observers were disappointed by the promise, which may not go far enough to forestall 2 degrees Celsius of warming. But the pledge’s conservatism reveals the delicate and shifting politics of China’s grid — and how the country’s central government and its provinces fight over keeping the lights on.
On this week’s episode of Shift Key, Rob and Jesse talk to Michael Davidson, an expert on Chinese electricity and climate policy. He is a professor at the University of California, San Diego, where he holds a joint faculty appointment at the School of Global Policy and Strategy and the Jacobs School of Engineering. He is also a senior associate at the Center for Strategic and International Studies, and he was previously the U.S.-China policy coordinator for the Natural Resources Defense Council.
Shift Key is hosted by Robinson Meyer, the founding executive editor of Heatmap, and Jesse Jenkins, a professor of energy systems engineering at Princeton University.
Subscribe to “Shift Key” and find this episode on Apple Podcasts, Spotify, Amazon, YouTube, or wherever you get your podcasts.
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Here is an excerpt from our conversation:
Robinson Meyer: Your research and other people’s research has revealed that basically, when China started making capacity payments to coal plants, in some cases, it didn’t have the effect on the bottom line of these plants that was hoped for, and also we didn’t really see coal generation go down or change in the year that it happened. It wasn’t like they were paying these plants to stick around and not run. They were basically paying these plants, it seems like, to do the exact same thing they did the year before, but now they also got paid. And maybe that was needed for their economics, we can talk about it.
Why did coal get those payments and not, say, batteries or other sources of spare capacity, like pumped hydro storage, like nuclear? Why did coal, specifically, get payments for capacity? And does it have to do with spinning reserve? Or does it have to do with the political economy of coal in China?
Michael Davidson: When it came out, we said exactly the same thing. We said, okay, this should be a technology neutral payment scheme, and it should be a market, not a payment, right? But China’s building these things up little by little. Over time we’ve seen, historically, actually, a number of systems internationally started with payments before they move to markets because they realize that you could get a lot more competitive pressure with markets.
The capacity payment scheme for coal is extremely simple, right? It says, okay, for each province, we’re going to say what percentage of our benchmark coal investment costs are we going to subsidize. It’s extremely simple. It does not account for how much you’re using it at a plant by plant level. It does not account for other factors, renewables, etc. It’s a very coarse metric. But I wouldn’t say that it had had some, you know, perverse negative effect on the outcome of what coal generation is. Probably more likely is that these payments were seen, for some, as extra support. But then for some that are really hurting, they’re saying, okay, well then we will maybe put up less obstacles to market reforms.
But then on top of that, you have to put in the hourly energy demand growth story and say, okay, well you have all these renewables, but you don’t have enough storage to shift to evening peaks. You are going to rely on coal to meet that given the current rigid dispatch system. And so you’re dispatching them kind of regardless of whether or not you have the payment schemes.
I will say that I was a skeptic, right? Because when people told me that China should put in place a capacity market, I said, China has overcapacity. So if you have an overcapacity situation, you put in place a market, the prices should be zero. So what’s the point? But actually, when you’re looking out ahead with all of this surplus coal capacity that you’re trying to push down, you’re trying to push those capacity factors of those coal plans from 50%, 60%, down to 20% or even lower, they need to have other revenue schemes if you’re not going to dramatically open up your spot markets, which China is very hesitant to do — very risk averse when it comes to the openness of spot markets, in terms of price gaps. So that’s a necessary part of this transition. But it can be done more efficiently, and it should done technology neutral.
And by the way that is happening in certain places. That’s a national scheme, but we actually see that the implementation — for example, Shaanxi province, we have a technology neutral scheme that would include other resources, not just coal.
Mentioned:
China’s new pledge to cut its emissions by 2035
What an ‘ambitious’ 2035 electricity target looks like for China
China’s Clean Energy Pledge is Clouded by Coal, The Wire China
Jesse’s upshift; Rob’s upshift.
This episode of Shift Key is sponsored by …
Hydrostor is building the future of energy with Advanced Compressed Air Energy Storage. Delivering clean, reliable power with 500-megawatt facilities sited on 100 acres, Hydrostor’s energy storage projects are transforming the grid and creating thousands of American jobs. Learn more at hydrostor.ca.
A warmer world is here. Now what? Listen to Shocked, from the University of Chicago’s Institute for Climate and Sustainable Growth, and hear journalist Amy Harder and economist Michael Greenstone share new ways of thinking about climate change and cutting-edge solutions. Find it here.
Music for Shift Key is by Adam Kromelow.
A new list of Department of Energy grants slated for termination will hit clean energy and oil majors alike, including Exxon and Chevron.
A new list of Department of Energy grants slated for termination obtained by Heatmap reveals an additional 338 awards for clean energy projects that the agency intends to cancel. Combined with the 321 grants the agency said it was terminating last week, the total value is nearly $24 billion.
While last week’s announcement mostly targeted companies and institutions located in Democratic states, the new list appears to be indiscriminate. Conrad Schneider, the senior U.S. director at Clean Air Task Force, told me in a statement that the move “will have far-reaching consequences — with virtually no region unscathed.”
“The federal government plays an essential role in addressing gaps that stall the commercialization of energy breakthroughs by providing grants and loans to accelerate innovative projects,” he said. “By abruptly canceling funding for several hundred energy projects, the U.S. risks ceding American energy leadership and signals that U.S. innovation is not a priority.”
Some of the most significant new terminations on the list include:
While two of the seven hydrogen hubs — those in California and the Pacific Northwest — were on last week’s cancellations list, all seven have their status listed as “terminate” on this new list. That includes hubs that planned to make hydrogen from natural gas based in Appalachia, the Gulf Coast, Texas, and the Midwest.
Those awards came out of $8 billion allocated by Congress in the IIJA in 2021 to develop hubs where companies and states would work together to produce and test the use of cleaner hydrogen fuel in new industries. The move would hit oil majors in addition to green energy companies. Exxon and Chevron were partners on the Hyvelocity hydrogen hub on the Gulf Coast.
“If the program is dismantled, it could undermine the development of the domestic hydrogen industry,” Rachel Starr, the senior U.S. policy manager for hydrogen and transportation at Clean Air Task Force told me. “The U.S. will risk its leadership position on the global stage, both in terms of exporting a variety of transportation fuels that rely on hydrogen as a feedstock and in terms of technological development as other countries continue to fund and make progress on a variety of hydrogen production pathways and end uses."
The Inflation Reduction Act’s Domestic Manufacturing Conversion Grants, which were meant to support the conversion of shuttered or at-risk auto plants to be able to manufacture electric vehicles and their supply chains, would be fully obliterated based on the new list. All 13 grants that were awarded under the program are there, including $80 million for Blue Bird’s new electric school bus plant in Fort Valley, Georgia, $500 million for General Motors’ Grant River Assembly Plant in Lansing, Michigan, and $285 million for Mercedes-Benz’s next-generation electric van plant in Ladson, South Carolina.
Some of the other projects slated for termination raise questions about other projects from the same grant program that are not on the list. For example, a $45 million grant for the National Rural Electric Cooperative Association to deploy microgrids in seven communities shows up as terminated, along with several other awards made as part of the IIJA’s Energy Improvements in Rural or Remote Areas program. Grants for indigenous tribes in Alaska, Wisconsin, and throughout the Southwest from that program appear to be preserved, however.
A $9.8 million grant to Sparkz to build a first-of-its-kind battery-grade iron phosphate plant in West Virginia also makes an appearance. The award was made as part of a nearly $430 million funding round from the IIJA to accelerate domestic clean energy manufacturing in 15 former coal communities. Similar awards made to Anthro Energy in Louisville, Kentucky, Infinitum in Rockdale, Texas, Mainspring Energy in Coraopolis, Pennsylvania, and a company called MetOx International developing an advanced superconductor manufacturing facility in the Southeast appear to be safe.
When asked about the new list, DOE spokesperson Ben Dietderich told me by email that he couldn’t attest to its validity. He added that “no further determinations have been made at this time other than those previously announced,” referring to the earlier 321 cancellations.
A new list of grant cancellations obtained by Heatmap includes Climeworks and Heirloom projects funded by 2021 infrastructure law.
Trump’s Department of Energy is planning to terminate awards for the two major Direct Air Capture Hubs funded by the Bipartisan Infrastructure Law in Louisiana and Texas, Heatmap has learned.
An internal agency project list shared with Heatmap names nearly $24 billion worth of grants with their status designated as “terminated,” including the Occidental Petroleum’s South Texas DAC Hub as well as Project Cypress, a joint venture between DAC startups Heirloom and Climeworks.
Christoph Gebald, the CEO of Climeworks, acknowledged “market rumors” in an email, but said that the company is “prepared for all scenarios.”
“Demand for removals is increasing significantly, with momentum set to build as governments set their long-term targets,” he said. “The need for DAC is growing as the world falls short of its climate goals and we’re working to achieve the gigaton capacity that will be needed.”
Heirloom’s head of global policy, Vikrum Aiyer, said that the company was not aware of any decision from the DOE and continued “to productively engage with the administration in a project review.” He added that Heirloom remains “incredibly proud to stand shoulder to shoulder with Louisiana energy majors, workforce groups, non-profits, state leaders, the governor and economic development organizations who have strongly advocated for this project.”
Much of the rest of the list overlaps with the project terminations the agency announced last week as part of a spate of retributive actions against Democrats during the government shutdown. “Nearly $8 billion in Green New Scam funding to fuel the Left’s climate agenda is being canceled,” White House Budget Director Russ Vought wrote on social media ahead of the announcement.
DOE spokesperson Ben Dietderich told me by email that the department was “unable to verify” the new list of canceled grants, and that “no further determinations have been made at this time other than those previously announced.”
“As [Secretary of Energy Chris Wright] made clear last week, the Department continues to conduct an individualized and thorough review of financial awards made by the previous administration,” Dietderich said.
Direct air capture is a nascent technology that sucks carbon, as the name suggests, directly from the air, and is one of several carbon removal solutions with potential to slow global warming in the near term, and even reverse it in the long run. The $3.5 billion DAC Hubs program, created by Congress in the 2021 Bipartisan Infrastructure Law, promised to “establish a new sector of the American economy and remake another one, while providing the world with an important tool to fight climate change,” as my colleague Robinson Meyer put it.
After a competitive application process, the Biden administration selected two projects that would receive up to $600 million each to build DAC projects capable of removing more than 1 million tons of carbon from the atmosphere per year and storing it permanently underground. Occidental, which first partnered with and later acquired a Canadian DAC startup called Carbon Engineering, would build its hub in South Texas, near Corpus Christi. Two other leading DAC startups, the California-based Heirloom Carbon and Swiss company Climeworks, would work together to build a hub in Louisiana. After the selections were announced, both projects received an initial $50 million award for their next phase of development, which was set to be matched by private investment.
"These hubs were selected through a rigorous and competitive process designed to identify projects capable of advancing U.S. leadership in carbon removal and industrial decarbonization,” Jennifer Wilcox, the former principal deputy assistant secretary for the DOE’s Office of Fossil Energy and Carbon Management, told me in an email. “The burden should be on DOE to clearly demonstrate why that process is being overturned.”
All three companies already have demonstration plants that are either operating or under construction. Climeworks began operating the world’s first commercial DAC plant in Iceland in 2021, designed to capture about 4,000 tons per year, and has since scaled up to a larger plant more than eight times that size. Heirloom opened the first DAC plant in the U.S. in November 2023, in Tracy, California, capable of capturing 1,000 tons per year. Occidental’s first DAC project, Stratos, in West Texas, will be the largest of the bunch, designed to capture 500,000 tons per year. It is set to be completed in the next few months.
Removing carbon from the air with one of these facilities is currently extremely expensive and energy-intensive. Today, companies pre-sell carbon credits to airlines and tech companies to raise money for the projects, but will likely require government support to continue to innovate and bring the cost down. While both Climeworks and Heirloom announced the sale of credits that would support their DAC hub projects, it’s not clear whether those credits were meant to be fulfilled by the projects themselves.
The DOE grants would have helped prove the viability of the technology at a scale that will make a measurable difference for the climate, while also demonstrating a potential off-ramp for oil companies and the economies they support. Both projects said they expected to create more than 2,000 local jobs in construction, operations, and maintenance.
“The United States, up to this point, was the direct air capture leader and the place where top innovators in the field were choosing to build facilities as well as manufacture the actual components of the units themselves,” Jack Andreasen Cavanaugh, a global fellow at the Columbia University’s Carbon Management Research Initiative, told me. “The cancellation of these grants to high-quality projects ensures that these American jobs will be shipped overseas and cede our broader economic advantage.”
That’s already happening. On the same day last week that the DOE announced it was terminating an award for CarbonCapture Inc., another California-based DAC company, the startup said it would move its first commercial pilot from Arizona to Alberta, Canada. Gebald, of Climeworks, said the company has “a pipeline of other DAC projects around the world,” including opportunities in Canada, the U.K., and Saudi Arabia.
Cavanaugh also pointed out there was a disconnect between the terminations, Congress’ recent actions, and even actions under the first Trump administration. Trump’s DOE revised the 45Q tax credit for carbon capture in 2018 to allow direct air capture projects to qualify. In July, the reconciliation bill preserved that credit and strengthened it. “These were bipartisan-supported projects, and it goes expressly against congressional intent.”
As the DAC hubs program was congressionally mandated and the awards were under contract, the companies may have legal recourse to fight the terminations. The press release from the DOE announcing last week’s terminations said that award recipients had 30 days to appeal the decision. “That process must be meaningful and transparent,” Wilcox said. “If DOE is invoking financial-viability criteria, companies and communities deserve to see the underlying metrics, thresholds, and justification — and to understand whether those criteria are being applied consistently across projects.”
While this isn’t a death knell for DAC in general, it will be a “massive setback for American climate and industrial policy”, Erin Burns, executive director of the carbon removal advocacy group Carbon 180, told me. “The need for carbon removal hasn’t changed. The science hasn’t changed. What’s changed is our political will, and we’ll feel the consequences for years to come.”
Editor’s note: This piece has been updated to add comment from the Department of Energy and to correct the total value of canceled grants.