The Biden administration has proposed new rules on how it will implement the Inflation Reduction Act (IRA) provisions, which restrict which electric vehicles (EVs) are eligible for tax credits. The IRA, signed by President Biden in August, aims to reduce reliance on hostile nations like China and bolster domestic EV battery supply chains.
The rules issued by the Treasury Department on Friday provide clarity on the sourcing requirements for critical minerals and battery components that automakers must use in EV batteries to ensure eligibility for the full $7,500 credit. The rules specify that 40% of critical minerals contained in an EV’s battery must have been extracted or processed in the U.S. or countries with free trade agreements with the U.S. beginning in 2023. This share of critical minerals then increases by 10% each subsequent year until 2027 when 80% of minerals must be sourced under the conditions.
Also, starting in 2023, at least 50% of an EV’s battery components must be produced or assembled in North America, according to the regulations. In succeeding years, this proportion rises until it hits 90% in 2028. EVs that satisfy both the standards for key minerals and battery components are entitled to the full $7,500 credit, while those that satisfy only one of the requirements are only entitled to a $3,750 credit.
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While the rules provide clarity on how the administration plans to implement the IRA’s tax provisions, there is still uncertainty regarding how the administration will implement the requirement that bars EVs assembled with any battery components or critical minerals sourced from a “foreign entity of concern” beginning in 2024 and 2025, respectively. This provision would disqualify EVs with chinese-sourced components and minerals from being eligible for the credit. Details on the implementation of this provision are expected to come at a later date.
The rules may create uncertainty since it appears to open the door for companies to extract critical minerals in listed nations but process those minerals in an unlisted nation. The Biden administration officials told reporters that the rule was intended to incentivize companies to only extract and process minerals in listed nations.
These new regulations are a step towards the Biden administration’s goal of having 50% of new automobile sales be electric by 2030. According to Treasury Secretary Janet Yellen, IRA is improving supply chains, generating employment, and enhancing energy and national security while cutting costs for American consumers and constructing a strong industrial base.
