EVs Lose Tax Credit Status, Threatening Adoption

As a result of new regulations on the number of components that Chinese and other foreign firms may manufacture, the number of electric vehicles (EVs) eligible for tax credits dropped from 47 to 19 on Monday. The Inflation Reduction Act states that from January 1, the credit will no longer be available to manufacturers whose electric car batteries come from a foreign entity of concern, like China. Any Chinese corporation, including U.S. subsidiaries and those over whom the Chinese government has 25% or more ownership, is now considered a “foreign entity of concern” according to the Treasury Department’s new, somewhat more compact definition.

Due to a new IRA regulation that went into effect on January 1st, requiring EVs to be constructed in North America to be eligible, just 20 out of 103 electric cars on the market presently qualify for the $7,500 federal tax credit that EV owners have enjoyed for over a decade. Forty percent of the minerals and fifty percent of the battery components used in electric vehicles must originate from North America or a nation with whom the United States has a free trade agreement, according to the new IRA regulation. The regulation states that as of December 31st, no electric vehicle tax credit will be allowed if the EV battery contains components from a problematic nation like China.

Worldwide, 75% of lithium-ion batteries are manufactured in China, with just 7% coming from the United States. The new IRA regulation mandates domestic or trade partner sources, including Korea, Australia, Canada, and Chile, must be used for electric vehicle component materials. In addition to lithium, China processes almost all of the minerals used in electric vehicles. Extracting such minerals from U.S. soil will take time and cost, but attempts are ongoing to get more of them.

Even while the Inflation Reduction Act requires the United States or its favorable trade partners to acquire enough cobalt, lithium, and other minerals for electric vehicle manufacture by the deadline, it is still not evident if this will be possible, particularly since automakers plan to increase EV production significantly.