WASHINGTON – Automakers are rolling out new electric models at a fast clip, with customers looking to take advantage of a $7,500 federal tax credit for electric vehicles that was expanded last year under the Inflation Reduction Act.
But that rollout is looking increasingly tenuous, with very few electric models likely to qualify for the tax credit once new domestic content provisions go into effect later this year, auto industry executives say.
At the Washington, D.C., Auto Show, which runs through Jan. 29, Ford, GM, Hyundai and other automakers showed off their latest electric offerings, promoting better battery life and a host of other features. But behind the scenes, there was concern it could be years before they are able to build enough battery plants in North America to supply their assembly lines or establish mineral supply chains outside of China, which currently dominates the world’s market for the lithium that is intrinsic to modern batteries.
“You have to go through all these gates, and who knows who’s going to comply,” Rob Hood, vice president of government affairs at South Korea-based automaker Hyundai Motor Corp., said last week. “It’s our expectation very few electric vehicles are going to be able to comply at least for the first year or two.”
What impact the loss of tax credit would have on consumers’ interest in electric vehicles remains to be seen, but for now analysts continue to project continued growth. In September, after the passage of the Inflation Reduction Act, analysts at Bloomberg New Energy finance projected electric vehicle says would reach more than 50 percent of all U.S. car sales by 2030.
The delay in finalizing provisions of the tax credit qualifications comes as the Biden administration looks to move American drivers and businesses away from petroleum-fueled vehicles, with plans to get America’s transportation sector to net-zero emissions by mid century.
For oil companies in Texas and around the world that have made a business of providing fuel for cars and trucks for a century, such a transition would radically upend their business model. Transportation accounts for close to 60 percent of global oil demand, according to the International Energy Agency.
For now, the rules that will determine which models qualify for the tax credit are still being decided by the Internal Revenue Service. Under the Inflation Reduction Act, 50 percent of an EV’s battery’s components must be assembled in North America and 40 percent of the minerals used in the vehicles must be imported from countries with which the United States has a free trade agreement. The law didn’t specify how exactly those percentages are judged to have been met.
Democrats have to some degree envisioned automakers would initially struggle to meet the domestic content requirement.
The Inflation Reduction Act includes tens of billions of dollars in loans for battery manufacturing and the mining and processing of critical minerals, with a joint venture between GM and LG already claiming a $2.5 billion loan last month to build battery plants in Michigan, Ohio and Tennessee.
And battery manufacturers and automakers have announced a steady stream of new battery plants, adding up to $128 billion in investment, according to the think tank Atlas Public Policy.
Still, it is likely to take years to build out U.S. supply chains to meet demand for electric vehicles. More than 232,000 electric models were sold in the United States between July and October last year, accounting for 7.1 percent of all car sales, according to the trade group Alliance for Automotive Innovation.
At an event hosted by the auto show Jan. 19, Michael Berube, deputy assistant secretary for sustainable transportation at the Department of Energy, said he wasn’t sure how many models would initially qualify for the tax credit, but that the requirements were necessary to built out U.S. manufacturing capacity for electric vehicles.
“Well have to see which models qualify for the credit, but I have no doubt there will be vehicles that qualify,” he said. “In five-to-seven years people will look back and see the wisdom in this.”
Meantime, automakers are rushing to figure out how they can modify their supply chains to allow their vehicles to qualify for the tax credit.
When asked whether any of its vehicles would qualify for the credit when the final rules come out, Chrysler Stellantis, one of the largest U.S. auto manufacturers, said it was still studying guidance put out by the IRS last month. A spokesman for GM said the company expects, “we will have some electric vehicles qualify for some level of credit,” when the rules are announced.
Ford did not respond to a request for comment.
What effect the absence of the $7,500 tax credit would have on electric vehicle sales is an open question within the auto industry.
Under the previous federal program for electric vehicles, the first 200,000 electric vehicles produced and sold by an automaker qualified for a $7,500 tax credit. Tesla hit the cap on that tax credit in 2018, and its sales continued to increase.
But executives with other car manufacturers are not confident their customers would abide the loss so easily.
“It’s $7,500,” Hood said. “That’s a lot of money for most Americans.”
At the moment, car buyers are enjoying a grace period from the domestic manufacturing provision. But once the IRS rules are released in March, it’s likely 70 percent of electric vehicles will no longer qualify for the tax credit, John Bozzella, president of the Alliance for Automotive Innovation, wrote in a recent blog post.
“It’s possible that EVs that were previously eligible are all of a sudden ineligible – or only partially eligible – because of the stricter battery content and mineral requirements,” he wrote.
Confusion around the tax credit comes as some question the logic and difficulty in shifting to electric vehicles so quickly.
Japanese automaker Toyota, for instance, has held off committing entirely to the technology and is instead working on improving hybrid vehicles such as its popular Prius model, in addition to releasing new hydrogen fuel cell and battery-powered electric models.
“We all agree on a carbon-neutral future, but not on how to get there,” Jason Keller, director of dealer policy with Toyota Motor North America, said at the auto show Thursday. “For Toyota, we don’t believe theres only one path.”
