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Electric Vehicles

The Inflation Reduction Act: Grading Its Impact on Cars, from A+ to F

Here’s where Biden’s climate law is having the biggest impact on the automotive industry — and where it’s falling short.

The Inflation Reduction Act: Grading Its Impact on Cars, from A+ to F

Around this time last summer, it seemed more apparent than ever that 2023 would be the year the gasoline-free automotive future was set to begin. After a decade that included electric vehicle fits and starts, Volkswagen’s diesel cheating scandal, the rise of Tesla, the EV boom in China, and a whole new generation of car buyers more aware of their personal impact on the climate than ever, it felt like the dawn of an EV-focused tomorrow was just around the corner. All it needed was a spark.

The Inflation Reduction Act, an admittedly poorly named piece of legislation packed with climate and green energy provisions, was meant to be exactly that. On the automotive front, the Biden administration’s signature legislation package included massive subsidies for EV battery plants, strict rules around where cars are produced and batteries are sourced, and a reset on America’s outdated EV tax incentive scheme for car buyers. It seemed grand on a scale not seen since the Johnson years: thousands of jobs, some $100 billion in funding, and a chance for America to kneecap China in the EV arms race.

So a year after the IRA’s passage, is all this investment working? The definitive answer is this: mostly, kinda.

While it’s highly questionable that the IRA has successfully Reduced Inflation, the effect of the legislation on America’s automotive manufacturing landscape has already been palpable. A recent report from the Environmental Defense Fund shows EV industry investments in the U.S. rising in 2021 around the passage of the Bipartisan Infrastructure Law, before taking off in a near-vertical fashion after the IRA was passed.

I decided to grade the IRA’s impact on America’s automotive sector — not just the Big Three U.S. automakers, but all companies who make cars here and support them — in a few key areas.

What I found is that a year in, the IRA feels like it could permanently reset our car industry. But in some key areas, its effects aren’t even close to being seen, and on other fronts, the IRA has caused a number of unintended consequences that will play out for years to come.

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  • Battery Plants: A+

    This is arguably the biggest shift we’ve seen thanks to the IRA, and it’s certainly working.

    Making batteries for tomorrow’s EVs won’t be as simple as turning car engine plants into battery plants; the supply chain, manufacturing process, and labor needs are entirely different. And so new facilities are springing up left and right to meet this moment.

    The Electrification Coalition, a nonprofit policy organization that advocates for EV adoption, identified more than a dozen battery manufacturing and recycling factories that have been announced or are under construction thanks to IRA incentives. These projects are, on average, $3 billion or more, and they’ll provide batteries for future cars from General Motors, Rivian, Hyundai, Tesla, Volkswagen’s new electric Scout brand, and more.

    Would this new battery ecosystem have happened without the IRA? Maybe. But certainly not this quickly or at this scale. The automakers may be moving in the direction of electrification, but it’s doing so begrudgingly and these incentives — coupled with state and local ones as well — gave them a reason to move quicker than “the market” would’ve done.

    Electric Vehicle Production: A+

    That’s good news for batteries. What about the cars themselves? Since the IRA heavily incentivizes batteries and EVs to be made locally — which I’ll touch on in a moment — it’s kicking off a surge in U.S. car manufacturing the likes of which haven’t been seen in decades.

    While battery factories themselves are getting the lion’s share of the attention and money, automakers are adding new factories, expanding existing ones, and retooling lines to scale up their EV outputs.

    Granted, many automakers are still investing heavily into (or hedging their bets on) their profitable gasoline models, especially big trucks and SUVs. But EV production is ramping up in America and that scale should eventually drive prices down. Simply put, if a car company — GM, Ford, Nissan, BMW, Hyundai, all of them — builds in the U.S., they’re about to start making EVs here too.

    China: B

    There’s an undercurrent that can be found across all of the Biden administration’s climate and tech investments: cutting off a rising China in countless areas. It’s why only EVs with “final assembly” in North America, that don’t source batteries or components from China, qualify for tax incentives. China has made huge investments into not only its own EV industry but controlling the supply chain around it, and America doesn’t want to cede that to a potentially hostile, non-allied peer state that has a horrific record on human rights and civic freedoms.

    Is it working? So far, yes. However, it’s not going to happen overnight. Just as the Center for Strategic and International Studies called it last year, “in the short term it will be difficult to avoid Chinese supply chains.” That’s true of chips, minerals, and everything else.

    Moreover, don’t expect automakers to give up the potential of exporting Chinese-made cars. Tesla already sells China-made EVs in Canada, and Volvo has found a George Washington-era loophole to sell the affordable EX30 electric crossover in America without steep tariff penalties. IRA rules may keep Chinese batteries out of our country and stiff tariffs hamper automakers like BYD for now, but this side of things is far from settled.

    EV Purchasing: C

    Now, it’s time for our lesson in unintended consequences. The new $7,500 EV tax credits have strict requirements; essentially, the cars and their batteries have to be built in North America. Given the long-term nature of these investments, not every automaker with an EV lineup can meet those rules for now, leaving a lot of cars out of the credit. (South Korea’s Hyundai Motor Group, in particular, got pretty burned here, leaving its excellent EVs on the expensive side.)

    Long-term, these cars and their batteries will be built locally and more cars will qualify for the tax credit. For now, the high cost of EVs is proving to be a major deterrent to adoption. Buyers, squeezed by interest rates and the rising cost of everything, are having trouble justifying the switch. So far the biggest winner is Tesla, which has always been building EVs and batteries in America.

    I think a better approach would’ve been to allow all EVs to qualify for the full tax credit until, say, 2026 or so; after that, and perhaps after a gradual phase-in, automakers would have to build local or charge higher prices. That would’ve given them time to ramp up these factories and pushed EV adoption harder at the same time. At the start of the year, before a ton of EVs and hybrids got kicked out of the program, that’s exactly the trend we saw.

    That’s what I would’ve done. But, to date, Joe Biden has not put me in charge of such things.

    Jobs: A+

    This one is due to be an objective win for the IRA. That Environmental Defense Fund report counts 84,800 jobs that have been announced for the EV industry in America since the IRA’s passage.

    According to their data, nearly all of those are located in Southern states. Georgia’s the biggest winner here, believe it or not. And Tennessee, South and North Carolina, and Kentucky are all seeing, or will soon see, big booms in EV-related job growth. The same is true for Michigan, the home of America’s auto industry, as well as lithium-rich Nevada, where Tesla has had a foothold for years.

    Again, there’s another universe where the IRA didn’t pass and all of those jobs went to China instead as America’s automakers put their patriotism on the back burner to chase lower labor costs and easy profits. The U.S. is getting a major employment boost instead.

    Labor: C

    But there’s a difference between “jobs” and “good jobs.” Take a newly militant United Auto Workers union, currently locked into unusually bitter contract negotiations with the Big Three American automakers. One thing they’re mad about: those battery factories going up everywhere, especially the joint-venture ones, don’t automatically lead to union jobs. (One GM-LG battery plant in Ohio voted to unionize with the UAW last year but doesn’t have a contract yet.)

    The result is that those battery plant workers could make considerably less money than America’s unionized auto workers, as my colleague Emily Pontecorvo reported in June. Adding insult to injury, EVs generally need fewer parts and labor than conventional cars to assemble; indeed, those battery plant jobs could one day form the bulk of America’s automotive labor force.

    The UAW did support the IRA’s passage last year. But that also happened before the union’s much tougher current leadership came in; I’m not convinced it would have gone the same way today. In general, the law doesn’t do a ton for labor, and that’s why the reliably Democratic UAW has held off on endorsing Biden.

    So far, the Biden administration doesn’t have a great answer for this, either. The president himself is doing the “Can’t we all just get along?” dance, but that may be the best he can do as he navigates climate, geopolitical, industry, and labor needs at the same time. And the move to EVs is expected to define the automotive labor world — here and globally — for the next few decades.

    Awareness: F

    As Ryan Cooper astutely noted this week, the IRA’s biggest problem is arguably one of awareness. Very few people seem to know about these investments or what’s coming from them. That lack of awareness could be the IRA’s biggest threat.

    Maybe that’s a problem more for Biden than the EV industry, America’s supply chain, or the climate, but when nobody knows about the president’s biggest achievement — especially in all those red states where the jobs are going — you have to wonder what a change at the White House next year could mean for all of this momentum. It’s not like those battery plants under construction will just disappear, but I wouldn’t put it past a less climate-focused White House (or Congress) to find a way to thwart all this progress.

    There’s also the rising right-wing backlash to EVs in general, predicated more on the messaging power of the fossil fuel industry and our own endlessly stupid culture wars. In short, though these investments do take time, very few people seem to know about them or see the benefits that will come from them.

    Auto industries are always heavily subsidized and regulated by the countries they come from. It was true of Japan after World War II, it’s been true of China for the past 20 years, and it’s certainly been true in various ways in America for a century. The IRA is just the biggest such move the U.S. has seen to modernize, compete and innovate in a world where gas cars could eventually be discarded as obsolete technology.

    The groundwork has been laid. Now we’ll find out if it has staying power.

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