US electric vehicle (EV) uptake is poised to accelerate due to new incentives within the Inflation Reduction Act, but strings are attached. Federal EV tax credits of $7,500 have been available to EV buyers for many years, but the IRA clears away several big obstacles that had limited how far — and how quickly — the credits could be applied.
The catch: the law also includes many restrictions on eligibility for the credits based on where the vehicle and battery are manufactured and where the critical minerals originate. This could limit the allure of the credit and its impact on EV sales, at least in the short term. In the long run, experts expect the measures to expand and nurture the already-growing EV manufacturing base on US soil and ultimately crank out more vehicles to send to US showrooms.
Common Man Wins
The EV tax credits, starting in 2023, will be available as an instant rebate of sorts. EV buyers no longer need to wait until the next annual tax return season to be refunded the value of the credit — they can instantly use it at the point of purchase. This is significant for consumers who simply cannot afford to “front” the price differential for an EV versus cheaper oil-powered cars, especially with inflation putting a dent in consumer pocketbooks.
“It’s the common man we’re trying to promote this for,” says Kevin Riddell, senior manager at LMC Automotive near Detroit. Additionally, wealthy car buyers can no longer qualify for the EV tax credits given new stipulations in the law on income level, although experts don’t expect this to affect sales much. The new law includes first-ever eligibility caps based on annual income — $150,000 for singles and $300,000 for couples. Also, some pricier EVs wouldn’t qualify for credits: electric sedans costing more than $55,000 and electric pick-up trucks, SUVs or vans priced above $80,000.
Dreaded Cap Gone
Another big win for EV uptake is the removal, starting in January, of a long-standing cap stating that only 200,000 EV tax credits can be claimed by consumers for each manufacturer’s lineup. General Motors and Tesla had already sold enough EVs to disqualify their customers from receiving the credits, and likely to follow suit were Toyota, Ford and Nissan. Many had criticized this cap as counterproductive by dis-incentivizing EVs from manufacturers that were doing the best job attracting consumers to go electric. In January, this cap will vanish. “It relevels the playing field again,” Riddell tells Energy Intelligence. “Every manufacturer has the credits, as long as you build the cars here.”
America and Allies
As always, “with the rose of the policy comes the thorn,” says Katherine Stainken, a vice president at the Washington-based Electrification Coalition. Not all EVs will qualify for the full $7,500 credit. Effective immediately as of the IRA’s signing on Aug. 16, only vehicles with “final assembly” taking place North America — the US, Canada or Mexico — are eligible. Final assembly refers to the assembly of the vehicle itself, not assembly of the components.
Then, things get even tougher. Starting in 2023, restrictions will kick in requiring that 50% of EV battery components must be manufactured or assembled in North America to qualify for the credits. If that threshold is met, half of the credit — $3,250 — can be claimed. Another requirement starting in January: 40% of the critical minerals used in an eligible EV’s battery must be mined on US soil or from a country holding a free trade agreement with the US. If met, that would allow the other half of the credit to be claimed. The percentages rise each year. Recycled materials would be eligible.
Take lithium as an example. Australia and Chile are both top lithium producers and both hold trade agreements with the US, so batteries built with those materials will be in the clear in terms of credit eligibility. But cobalt from top producer Congo (Kinshasa) would be ineligible to count toward the percentage requirements since that country is not one of the selected US trade partners. Aside from encouraging more local mineral production, the stipulation may encourage research and development into next-generation battery chemistries that use less cobalt, Stainken tells Energy Intelligence.
Models from some of the most popular brands among US consumers could be greatly affected by the country-of-origin restrictions. These include vehicles from Japanese companies like Toyota and Subaru and automakers elsewhere in Asia or in Europe, because those companies often use imported materials for vehicles they sell in the US, experts tell Energy Intelligence. Naturally, models from US manufacturers like General Motors, Ford and Tesla would be least affected.
The US will slam the door on anything EV-related from China at a swifter pace and with a stronger hand. Starting in 2024, eligible EVs must have no battery components at all made or assembled by “foreign entities of concern” — which includes top battery producer China. In 2025, the law goes a step further by requiring that the critical minerals within an EV battery are not extracted, processed or recycled in China — the world leader in many types of mineral processing.
‘Tornado’ Lands
The country-of-origin stipulations will be tough to meet. Lead times for transferring manufacturing plants and building mines would take several more years than the restrictions require. Yet the IRA, as well as the earlier US Bipartisan Infrastructure Law, does include incentives to help fund the movement of activities to US soil. “It’s not that the industry was left hanging,” explains Stainken. “Other provisions in the law should help to spur bringing the manufacturing back domestically and help build out processing plants.”
Another obstacle: dealerships and consumers are likely to have a tough time determining which vehicles are eligible for the credit — although the Department of Energy has already published a list of vehicles currently eligible under the immediate “final assembly” requirement.
The IRA, in many ways, lands a “tornado” in the middle of the wider vehicle and battery industries, Riddell says. “The IRA really brought in a whole lot of variability and uncertainty. There will be a lot of growing pains.”
Rising Uptake
So, given the mixed implications, what is the overall impact? Experts anticipate that the new provisions will attract more US EV purchases on the whole. Despite the new restrictions, consultancy Rhodium Group predicts that EVs will account for 32% of US light-duty vehicle sales in 2030, up from 22% without the IRA — and around 6% now (see graphs).
In the long run, the IRA provisions are expected to lay a stronger foundation for the US EV market by influencing both consumer and automaker decision-making. The country-of-origin requirements are “definitely going to change some plans for certain manufacturers who are perhaps going to eventually localize production to North America, or recentralize it, and now at an accelerated rate,” Mike Fiske, an associate director at S&P’s Global Mobility division, tells Energy Intelligence. He sees the wisdom in acting sooner rather than later to avoid politically controversial foreign dependence, as seen in the oil markets for generations. “As much as we can do now to localize and secure those supply chains, that’s going to bring a lot more security from a national defense standpoint,” he argues.
US ELECTRIC VEHICLE PENETRATION
Month
EV Sales
% LDV Sales EVs
Jul ’22
79,325
7.02%
Jun ’22
74,211
6.59
May ’22
73,608
6.66
Apr ’22
71,496
5.83
Mar ’22
72,899
5.85
Feb ’22
59,554
5.66
Jan ’22
53,465
5.39
Dec ’21
57,065
4.78
Nov ’21
46,511
4.64
Oct ’21
55,007
5.26
Sep ’21
43,959
4.37
Aug ’21
43,721
4.01
Jul ’21
52,114
4.04
Jun ’21
49,621
3.83
May ’21
53,779
3.41
Apr ’21
45,105
2.98
Mar ’21
46,057
2.90
Feb ’21
29,167
2.47
Jan ’21
30,913
2.82%
EVs = plug-in hybrids and full battery-electrics. LDVs = light-duty vehicles. Source: Wards Auto, US Argonne National Laboratory