Historic new climate bill could short-circuit EV tax credits

Historic new climate bill could short-circuit EV tax credits

President Joe Biden on Tuesday signed a far-reaching climate, energy and healthcare bill that invests an unprecedented $370 billion in energy and climate programs over the next 10 years, including incentives to expand energy renewables and electric vehicles.

The rapid and widespread adoption of electric vehicles will be essential if the United States is to meet its climate goals. And the new bill, which includes a host of other health and tax-related provisions, aims to encourage people to switch from gas-powered cars to electric ones by offering a tax credit of up to $7,500 for new electric vehicles and up to $4,000 for used electric vehicles through 2032.

But there’s a catch, and it could end up making it harder for most electric vehicles to qualify for the new incentive.

The bill requires new electric vehicles to meet strict sourcing requirements for critical materials, battery components and final assembly to qualify for tax credits. While some automakers, such as Tesla and GM, have well-developed domestic supply chains, no electric vehicle manufacturer currently meets all of the bill’s requirements.

Building a National Electric Vehicle Supply Chain

At first glance, the revised tax credits for electric vehicles seem like a smart move.

Existing US policy allows credits for the first 200,000 electric vehicles a manufacturer sells. Those credits helped fuel demand for electric vehicles. But industry leaders including Tesla and GM have already hit that limit, while most vehicles from foreign automakers are still eligible. The bill would remove the cap for individual automakers and extend tax credits through 2032, for any vehicle that meets supply requirements.

Right now, China dominates the global supply chain for lithium-ion materials and batteries used in electric vehicles. This is not an accident. Since the early 2000s, Chinese lawmakers have adopted aggressive policies that have supported advanced battery technologies, including investments in mining, materials processing, and manufacturing. I discuss how China got a head start in the race to a clean energy future in my new book, Charged Up: A History of Batteries and Lessons for a Clean Energy Future.

Sen. Joe Manchin, the West Virginia Democrat who stalled earlier efforts to get these measures passed in the heavily divided Senate, said he hopes the requirements will help expand the U.S. supply chain of critical domestic minerals.

Incentives for electric vehicles would complement other US policies aimed at boosting domestic electric vehicle manufacturing capacity. These include $7 billion in grants to accelerate battery supply chain development allocated in the Infrastructure Investment and Jobs Act of 2021 and a $3 billion expansion of the Advanced Vehicle Manufacturing Loan Program, included in the current bill, formally known as Inflation Reduction. Act.

The problem is that the supply requirements of the Inflation Reduction Act come online so quickly, starting in 2023, and increase so rapidly that the plan could backfire. Instead of expanding electric vehicle adoption, the policy could make almost all electric vehicles ineligible for tax incentives.

Even the Tesla Gigafactory depends on China

The bill excludes incentives for any new vehicle that contains battery materials or components extracted, processed, manufactured or assembled by a “foreign entity of interest,” a category that includes China.

According to Benchmark Intelligence, a market research company that tracks the battery industry, China currently controls 81% of the world’s cathode manufacturing capacity, 91% of the world’s anode capacity, and 79% of global lithium-ion battery manufacturing capacity. By comparison, the United States has 0.16% of cathode manufacturing capacity, 0.27% of anode manufacturing capacity, and 5.5% of lithium-ion battery manufacturing capacity.

Even the most advanced battery factories in the US, like Tesla’s Nevada Gigafactory, currently rely on materials processed in China. Despite Ford’s plans to expand its domestic supply chain, its most recent deals are to acquire batteries from Chinese manufacturer CATL.

In addition to excluding materials and components from China beginning in 2023, the bill also requires that a minimum percentage of battery materials and components come from the country or countries with which the US has a storage agreement. fair trade, such as Australia and Chile. . The threshold starts at 40% of the critical minerals value in 2023 and increases to 80% in 2027, with similar requirements for battery components.

If a manufacturer does not meet these requirements, your vehicle would not be eligible for the tax credit. Whether the Treasury Department proposes exemptions remains to be seen.

Although electric vehicle manufacturers are already looking at plans to develop supply chains that meet these sourcing requirements, proposals for mines and processing facilities often face challenges. Indigenous and environmental concerns have held back a proposed lithium mine in Nevada. In some cases, key materials, such as cobalt and graphite, are not easily sourced domestically or from fair trade partners.

Proposed recycling projects could help meet demand. Redwood Materials projects that its recycling facility, currently under construction in Nevada, will supply cathode and anode materials to support one million electric vehicles per year by 2025. Despite these optimistic projections, experts anticipate that recycling can only play a little role in offsetting the demand for raw materials needed to increase electric vehicle adoption in the next decade.

How much can the bill do to reduce emissions?

Clean energy supporters called the bill historic. In addition to massive investment in renewable energy and electric vehicles, it provides support for technologies, such as carbon capture and storage and carbon-free fuels, and includes a fee to reduce methane emissions, as well as some offsets that boost fuels. fossils. fuels

Forecasters have projected that the climate package as a whole could help put the US on track to reduce greenhouse gas emissions by about 40% by 2030 compared to 2005 levels, still below the goal of the Biden administration of a 50% reduction, but closer.

But for the US to achieve those goals, electric vehicles will have to replace fossil fuel-powered vehicles by the millions. A realistic tax credit for electric vehicles that gives manufacturers time to diversify their supply chains and makes these vehicles more affordable for all Americans will be crucial. The proposed policy risks short-circuiting electric vehicle tax credits just when they are needed most.

James Morton Turner is Professor of Environmental Studies at Wellesley College.

This article is republished from The conversation under a Creative Commons license. Read the original article.

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