If you’ve been considering a new electric vehicle or hybrid these past few months, and you think you’ve gotten a pretty good handle on how the revised EV tax credits work, the U.S. Treasury Department and the IRS have an unspoken message for you: Do it soon. The rules are about to change.
Again.
Today, federal officials announced changes to the EV tax credit plan around minerals and batteries. As esoteric and complicated as it sounds (and in fact, is) the headline for prospective buyers is that starting April 18, fewer EVs will be eligible for the new $7,500 tax credits unveiled last year as part of President Biden’s Inflation Reduction Act.
In short, these changes are being made today to guarantee that the full $7,500 EV tax credit goes toward not just cars built in North America, but cars containing battery components made on this continent as well. Moreover, it seeks to guarantee that certain critical minerals in those batteries come from countries with which the United States has a free trade agreement. Each requirement is worth up to $3,750.
Granted, “Where are your minerals from?” doesn’t quite have the same ring as “How much horsepower are you putting down?” to car aficionados. But these changes to the EV tax credits will reverberate through the car market and the entire auto industry.
In the short term, this means fewer EVs will qualify for the tax credits, even if they are made in North America. But in the longer term, it could create a major battery ecosystem here as well.
It’s worth keeping in mind the two car-related goals of the IRA when you consider these changes. One was to reduce carbon emissions by modernizing the EV tax credit scheme and spurring wider electric car adoption (which the incentives seem to be doing).
The other goal is to build a localized, North America-centric supply chain for batteries and EVs so that China — a peer state with whom U.S. tensions are quickly rising — cannot dominate the industry. Given China’s own aggressive EV industry push, things were certainly trending that way before.
“We need to build a clean energy supply chain that is not dependent on China,” a senior Treasury official said on a press call with reporters on Thursday. The official said that the revised guidance will reduce the number of vehicles that qualify in the short term, but will create incentives to bring supply chains and manufacturing to the U.S. These requirements will significantly increase the number of EVs made in North America over the next decade, officials believe, with more qualifying over the next decade than under the admittedly outdated pre-IRA policy.
The clear downside to all of this is that it could mean fewer EV sales for now if more cars lose the full $7,500 credit. That decision does run counter to the IRA’s goals of cutting car emissions, and it could dampen the hopes of car companies looking to make big EV product pushes in the coming years. Battery plants and mineral processing facilities will likely take years to get up and running. Ford, for example, is building a $3.5 billion Michigan battery plant but it isn’t projected to start making batteries until 2026.
As a result, some urgency may be warranted for EV buyers who want to take advantage of the full $7,500 tax credit. Until April 18, those rules mean that regardless of battery sourcing or minerals, cars like the Tesla Model 3, Chevrolet Bolt, Ford F-150 Lightning, Mustang Mach-E, Volkswagen ID.4, and multiple U.S.-made hybrids from BMW, Audi, and Volvo qualify for some or all of those credits, depending on the car’s price and the buyer’s income.
But automakers have said, correctly, that it takes years to set up local EV production, not to mention the local battery manufacturing and approved mineral sourcing. Hyundai and Kia, for example, make stellar EVs but they are made in South Korea, so they will no longer qualify for any EV tax credits — much to those automakers’ vocal chagrin. Other automakers may make their EVs locally but don’t meet the mineral sourcing requirements after April 18.
Moreover, the battery component requirement increases every year. Starting this year, to secure $3,750 of the tax credit — half of $7,500 — 50% of the battery components must be manufactured or assembled in North America. That rises 10% each year until 2029 when the battery must be entirely made on this continent to qualify for the full tax credit.
(Furthermore, starting next year, no EV will be eligible for any tax credit if its battery was made by “a foreign entity of concern,” which generally refers to China; in many ways, this cuts China’s battery industry out of the American auto supply chain because car companies won’t sacrifice their tax incentives to competitors just to use Chinese batteries.)
So what does this mean for car prices, exactly? That’s the tricky part. As with past changes to the IRA, it’s hard to say right now — automakers are currently sourcing batteries from a variety of places as they seek to ramp up local production.
Heatmap reached out to multiple automakers to determine if their car prices would be impacted.
General Motors indicated it’s waiting to learn more from the federal government before making a determination. “We believe GM is well-positioned because we were already actively pursuing opportunities to localize as much of the supply chain as possible,” a GM spokesperson said.
Ford thanked the Biden administration in an upbeat note from its CEO Jim Farley for clarifying the “important details” of the IRA. “Ford continues to accelerate our investment in America thanks to this important policy initiative,” Farley said, noting Ford would help its customers understand their eligibility for the tax credits.
In a statement sent to Heatmap, Volvo said it was reviewing the rules but remains “concerned that the consumer tax credit is overly complex and contains several immediate limitations.” It also pushed for a trade agreement with the European Union, saying “open markets and overall free trade policies lead to an increase in global economic prosperity, innovation, and higher living standards for people around the world.”
Officials from Toyota did not return a request for comment. (Toyota further declined to comment on the effects of a new trade deal on EV battery minerals signed between Japan and the U.S. this week that could potentially impact some of its cars.)
Federal officials said that on April 18, a revised list of eligible vehicles will be posted to FuelEconomy.gov, and it will also include the amount of credit available.
But that’s still a few weeks away. EV and hybrid buyers may do well to make a purchase before the rules change — that is, if they can find a car to buy. Many new EVs remain tough to find thanks to supply chain challenges and are on average pricier than ICE counterparts.
The answer is clear: Like a Mustang Mach-E using launch control, move fast before things change.
This article was updated at 10:55AM ET on March 31, 2023.
Auke-Florian Hiemstra