Dec 1, 2023 - Energy & Environment

Biden team releases EV tax credit foreign sourcing plans

an illustration of a pick axe with one of the pick ends shaped like a lightning bolt

Illustration: Tiffany Herring/Axios

Electric vehicles made with minerals and materials produced in China won't qualify for the IRA's consumer EV tax credit in the future, the Biden administration clarified Friday morning.

Why it matters: The proposed criteria will give EV manufacturers clarity they have lacked for more than a year. It also provides fresh urgency on how the companies should build new supply chains to get battery parts and key minerals from outside of China.

  • It'll be a tall order for carmakers to reshuffle their production or build the new mines, plants and factories they'll need fast enough to have cars to qualify before the credit expires.
  • As a result, some cars that have qualified for the credit in the past year will lose it once the foreign sourcing requirements kick in.

Driving the news: The Treasury and Energy departments unveiled the proposal for determining whether an EV's battery is made with parts or raw resources inappropriately linked to a "foreign entity of concern."

  • The new climate law created a $7,500 credit that goes directly to Americans buying an EV. But the car can't be made with components or minerals substantially under the control of a "foreign entity of concern."
  • "Foreign entity of concern" is a wonky term usually used by national security officials to reference adversarial nations or companies and individuals connected to those nations' governments.
  • It's often applied to China, Russia, Iran and North Korea.
  • Starting in 2024, qualifying EVs can't be made with battery components from a foreign entity of concern. In 2025, that requirement also kicks in for minerals used in batteries, like lithium, cobalt, graphite and nickel.

Reality check: It's incredibly likely cars are qualifying for the credit now that will no longer be able to take the government markdown once the requirements kick in.

  • Some automakers — including Tesla — have existing supply lines that will ensure their cars still qualify.
  • Other automakers, including new startups much smaller than Tesla, simply won't be able to without investing time and money in new business relationships.

Zoom in: Per the proposed criteria, minerals or materials from an entity incorporated in or performing the relevant industrial activities in a "foreign entity of concern" wouldn't be allowed in qualifying EVs.

  • The same is true for minerals and materials from a company where a "foreign entity of concern" holds at least 25% voting interest or board seats, directly or indirectly.
  • Lastly, the criteria says minerals or materials can be used when they're produced in a business venture that includes a licensing agreement with a "foreign entity of concern."
  • The criteria lay out specifications for how a licensing agreement must be organized for the sourcing requirements to be met.

There's a lot more in the weeds, like a proposal to give automakers through 2026 to set up sourcing plans for "de minimus" trace amounts of materials with relatively low value, like certain salts.

  • They also offered a phase-in for cars placed in service starting January 2024 through 30 days after the rule is finalized. But it's unclear when that'll be.

Of note: Now that this proposal is out, automakers are expected to tell Treasury and the public how many of their cars will still qualify.

  • That process will also reveal whether the licensing component of the criteria leaves room for arrangements like the Ford-CATL project in Michigan.
  • Also, starting in 2025, carmakers will be required to submit to the IRS how many compliant batteries they expect to buy or make each year, along with supporting documents.

The big picture: Much of the mining, refining and component manufacturing for batteries takes place in China.

  • No matter what U.S. officials want, that's not going to change anytime soon. That's for many reasons — including the simple fact some of the minerals batteries require aren't found in many other places.

What's next: Treasury will take public comment on the proposed criteria for 45 days.

What we're watching: The 2024 election. Some in the conservative braintrust recently went deep with Axios Pro Policy on how a future Trump administration would change the consumer EV credit.

  • Expect Congress to also go after the Biden administration's handling of the tax credit more in the future.
  • "I think we should, at a minimum, ensure that taxpayer dollars should not be used to finance partnerships in American automakers and Chinese battery companies," House select China panel chair Mike Gallagher told Axios on Thursday.
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