Climate Bill Passes: It Could Short-Circuit EV Tax Credits, Making Qualifying for Them Nearly Impossible

Yves here. One wonders if the fossil fuel industry snuck in the newly-stringent requirements to qualify for EV tax credits. After all, it sounds like Joe Manchin had a big hand in getting them in the climate package.

By James Morton Turner, Professor of Environmental Studies, Wellesley College. Originally published at The Conversation

Congress passed a far-reaching climate, energy and health care bill on Aug. 12, 2022, that invests an unprecedented US$370 billion in energy and climate programs over the next 10 years – including incentives to expand renewable energy and electric vehicles.

Rapid and widespread adoption of electric vehicles will be essential for the United States 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 trade their gasoline-fueled cars for electrics 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 difficult for most EVs to qualify for the new incentive.

The bill, which now heads to President Joe Biden’s desk, requires that new electric vehicles meet stringent sourcing requirements for critical materials, the components of the battery, and final assembly to qualify for the tax credits. While some automakers, like Tesla and GM, have well-developed domestic supply chains, no electric vehicle manufacturer currently meets all the bill’s requirements.

Building a Domestic EV Supply Chain

At first glance, the revised EV tax credits seem like a smart move.

Existing U.S. policy allows credits for the first 200,000 electric vehicles a manufacturer sells. Those credits helped jump-start demand for EVs. But industry leaders, including Tesla and GM, have already hit that cap, while most foreign automakers’ vehicles are still eligible. The bill would eliminate the cap for individual automakers and extend the tax credits through 2032 – for any vehicle that meets the sourcing requirements.

Right now, China dominates the global supply chain for materials and lithium-ion batteries used in electric vehicles. This is no accident. Since the early 2000s, Chinese policymakers have adopted aggressive policies that have supported advanced battery technologies, including investments in mines, materials processing and manufacturing. I discuss how China got a head start in the race toward a clean energy future in my new book, Charged: 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 through the sharply divided Senate, said he hopes the requirements will help scale up the U.S. domestic critical minerals supply chain.

The EV incentives would complement other U.S. policies aimed at jump-starting domestic EV manufacturing capacity. Those include $7 billion in grants to accelerate the development of the battery supply chain 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 the Inflation Reduction Act.

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

Even Tesla’s Gigafactory Relies on China

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

According to Benchmark Intelligence, a market research firm that tracks the battery industry, China currently controls 81% of global cathode manufacturing capacity, 91% of global 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 U.S.’s most advanced battery factories, such as 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 for sourcing batteries from Chinese manufacturer CATL.

In addition to excluding materials and components sourced from China starting in 2023, the bill also requires that a minimum percentage of the materials and components in batteries be sourced domestically or from countries the U.S. has a fair trade agreement with, such as Australia and Chile. The threshold starts at 40% of the value of critical minerals in 2023 and ramps up to 80% in 2027, with similar requirements for battery components.

If a manufacturer doesn’t meet these requirements, its vehicle would be ineligible for the tax credit. Whether the Treasury Department would come up with exemptions remains to be seen.

Although EV manufacturers are already pursuing plans to develop supply chains that meet these sourcing requirements, proposals for mines and processing facilities often face challenges. Indigenous and environmental concerns have slowed a proposed lithium mine in Nevada. In some cases, key materials, such as cobalt and graphite, are not readily sourced domestically or from fair-trade allies.

Proposed recycling projects could help meet demand. Redwood Materials projects 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 such optimistic projections, experts anticipate that recycling can only play a small role in offsetting the demand for raw materials needed to scale up electric vehicle adoption in the coming decade.

How Much Can the Bill Do to Cut Emissions?

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

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

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

This article was updated Aug. 12, 2022, with the House passing the legislation.

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  1. Ignacio

    EU free-marketeers are much worried that these EV rebates are only directed to US-manufactured EVs.

  2. QuantumSoma

    EV’s are important, but the elephant in the room that isn’t being addressed is the US’s absurd level of car dependency.

    1. Lex

      Indeed. Electric cars as personal transportation are the last leg of the changes needed. And none of this addresses freight transport which is done in the worst possible environmental way. If we were at all serious, we’d be building (rebuilding) freight rail and then implementing electric trucks for the “last mile” delivery.

      Even for personal transport, tax credits for purchasers has to be the least efficient way to speed up the adoption of electric vehicles. But I guess it makes a good show and at the end of the day the US government only knows how to talk loud without saying anything.

    2. Mikel

      And the disposal of all of the ICE vehicles.
      So much focus on what more needs to be produced and not as much on the clean-up.

    3. Louis Fyne

      inconvienent truth, covid killed mass transit usage in the US via moving to suburbs/Sun Belt and expanded car ownership

      every major transit system is nowhere near pre-covid ridership

      1. Thomas Schmidt

        Reaction to Covid killed them. Some bad studies attempting to show mass transit as superspreading environment. And the drop in ridership feeds on itself, as crime becomes easier with emptier trains.

        I recall reading that Bill Gates wanted the lockdown to help set up the work from home transition, and so save gasoline. That happened everywhere in 2020; I remember how bright and clear the air was in March, 2020, so bright I couldn’t drive near sundown because there was enough dust in the air to dull the light. What has happened since is that auto cities in Texas and Florida have more than recovered, while Manhattan is withering.


    4. Adam Eran

      Meanwhile, most new building continues to be sprawl (single uses, connected only by auto trips). This sets auto-dependency in concrete, literally.

      What’s needed is pedestrian-friendly, mixed use (commerce, offices, etc. among the residences, within a walk). That cuts vehicle miles traveled roughly in half.

      California has required all new development minimize vehicle miles traveled, and have “complete streets” (pedestrian-friendly streets), but my sources tell me developers and builders are ignoring those requirements.

  3. John Moffett

    If you want to really reduce emissions you should limit global air traffic, slash the US military budget and carbon footprint, and push big tax incentives for telecommuting. These 3 things alone would have a major impact. Then you could also add big tax incentives for companies to make their appliances more energy efficient. Switching from big ag to local sustainable farming would also help.

    While your at it you might cap off all those old oil and gas wells to stop methane leakage.

      1. drumlin woodchuckles

        Why not put a Hansen FeeTax on fossil carbon at all its sources of extraction and points of very first sale?

  4. Synoia

    The legislation is clearly designed to fail. No wonder Musk just sold a significant portion of his Tesla shares.

    And the Oil companies will also rejoice on the Impossible to fulfill aspects of the legislation.

    It is Kabuki Legislation, and needs to be exposed as such.

    1. Mike

      Oil companies, wealthy shareholders, pension funds, Saudi Arabia, Russia, Australia, China, India, Mexico, U.S., the travel industry, agriculture, cattle, ….etc. Oil companies are the tip of the iceberg. Think of all the money that is connected to energy production and consumption.

    2. Tim

      This legislation helps Telsa. Their credits already expired so it can’t hurt them, and by disabling the credits for competitors it helps level the playing field.

  5. Michael.j

    A very good article.

    I recall an article posted here about ten years ago by an energy analyst who pointed out the length of time it takes to develop an energy industry. This article confirms his prediction. He stated the lead time was about 20 years.

    I don’t think I have that link any longer, but the article may be well worth reposting, if you have it.

  6. Mike

    Until there is a worldwide compressive agreement enforced with sanctions and trade restrictions for violators, a U.S. CO2 emissions policy is a waste of time and money. CO2 emissions don’t stop at national borders. In 2020 Chinese emissions were at 31% of worldwide CO2 emissions and that percentage will significantly increase over the next decade if they build the 150 new coal plants they currently have planned. U.S. emissions were 14% and slowly declining. European emissions at 9% and declining.

    The last time world CO2 levels were this high was during the Pliocene Era and temperatures were +3C than today. That was a worldwide temperature. Temperatures over land masses were significantly higher than +3C. Unless there is CO2 removal from the atmosphere it is likely the earth will again see this environment after reaching equilibrium. Why don’t leftists discuss the physics behind this problem? American environmental policy is a fraud.

    1. drumlin woodchuckles

      If America withdrew from every Free Trade Organization and abrogated every Free Trade Agreement and Treaty it is currently in, America would have the sovereign national-economy freedom to self-impose its own carbon emissions controls on its own activities within its own borders. And it would also have the freedom to exclude imports from every single country which doesn’t do the very same thing.

      That is how we escape the ” everyone else will just keep skydumping the carbon” problem. We reclaim our freedom to ban carbon skydumping production from our trading enemies onto our economy.

    2. Jeff

      Yup. The idea that we will cut emissions while even allies like Australia don’t is folly.

      Why have goals of they don’t get us where we’re ostensibly trying to go?

      1. drumlin woodchuckles

        Diversionary goal-kabuki. Giving us a bunch of velcro decoy tinker toys to play with while the black hat perpetrators make off with the money and move on to new crime waves.

        International Co-operation is where good ideas go to die.

  7. Carla

    Seen here:

    GLOCATOE! (GLobal Carbon Tax On Everything!)

    If you can’t afford an electric car, or that tax on your ICE vehicle, utilities,etc, then maybe you should give up your car and walk, ride a bike or walk.

    1. ambrit

      America is not built out for walking to be a feasible method of living for the mass of the population. To do this the infrastructure in America will have to be adjusted towards densepack cities. That or a massive die off of the population should do the trick.
      Right now, my money is on the eventual primacy of ‘Jackpot Industries,’ a wholly owned subsidiary of ACME Industries.

    2. Carla

      In case anyone who knows me, commenter on NC as Carla since 2010, reads the above comment, I want to clarify that I did NOT write it.

  8. John Steinbach

    The primary reason North American and European emissions are declining & China’s increasing is because manufacturing moved to China. If you assign embedded energy in China manufactured products consumed in the Global North to the end users, the calculus changes.

    1. drumlin woodchuckles

      No it doesn’t, because under Free Trade, China will always underprice production in the North America and Europe no matter how carbon efficient it is . . . . in order to keep manufacturing exterminated in North America and Europe and in order to maintain and extend China’s monopoly on manufacturing.

      CommuNazi China’s end goal is to become the One Great Metropole and turn the rest of the world into One Great Hinterland and One Great Captive Market. Free Trade is how the economic warfare battlespace is shaped for CommuNazi China to achieve its One Ball One Chain goal of ruling the world.

      Free Trade is the new Slavery.
      Protectionism is the new Abolition.

      1. Don

        CommuNazi China? Seriously?

        There is not much space between rabid anti-China sentiment and anti-Chinese racism.

        1. witters

          DWC is like this with China. I once tried to point it out and was told I was hasbara (which I knew not). So I looked it up and still don’t know why.

        2. drumlin woodchuckles

          The Taiwanese are against submission to CCP ChinaGov Rule. Does that mean they are anti-Chinese racist?

  9. jan van mourik

    ..a massive investment in renewable energy and electric vehicles

    If you call this massive, then how do you quantity the defense funding bill 🤔

    1. Anthony G Stegman

      Yes….$37B per year is in no way “massive”. At best it ought to be seen as a small down payment. Even the recent weapons shipments to Ukraine exceeded $37B. We can be sure that additional massive shipments of weapons will be forthcoming.

  10. Anthony G Stegman

    Count me among the electric vehicle skeptics. Even with the taxpayer provided subsidies electric vehicles will still be unaffordable for the majority of current American vehicle owners. On top of that the projections for greenhouse gas reductions are far too rosy to be taken seriously. CO2 concentrations in the atmosphere will continue onwards and upwards as demand for oil, coal, and natural gas will continue to rise along with rising populations clamoring to consume more goods of all kinds. There is no such thing as sustainable energy in a world where populations and consumption continues to increase. Why are we kidding ourselves?

  11. Sjeng

    To believe that building 2.5 billion electric cars to replace 2.5 billion internal combustion cars will help prevent the global boil is insane. To give money to relatively well to do middle class people to encourage them to consume ‘the right things’ is antisocial and asinine. To meekly reform within the bounds of car and consumerism culture just will not do. They need to be confronted head on, for global survival and for social justice. The challenge is to make and present change so it is clear that it will not only reduce emissions, but also improve the quality of our lives.

  12. Anthony G Stegman

    Rather than wasting time and money pursuing mass adoption of electric vehicles (and all of their attendant issues) let’s embark on a multi-generation project to begin “de-commissioning” vast tracts of suburban wastelands. The suburban lifestyle is extremely energy intensive, and extremely wasteful of all kinds of resources. When one considers also the isolation and alienation that is part and parcel of the suburban lifestyle there will be many, many benefits accrued in transforming the suburban landscape into something livable and perhaps even sustainable (if we can get populations down considerably).

    1. drumlin woodchuckles

      Simply withdraw municipal and infrastructure support from suburbia and those people who are willing to live a post-suburbian neo-peasant lifestyle in every non-abandoned 5th or 6th house will do so. The rest will flee back into the city to eke out a support-dependent lifestyle there instead.

  13. Ranger Rick

    I had to look elsewhere for an explanation, but it would appear that the tax credit which would ordinarily only benefit people who owe that much in taxes can now be transferred to the dealer (and only the dealer, you can’t buy direct Tesla-style) to get the full amount off the price of the new or used vehicle. So it has that going for it at least.

  14. melvin keeney

    Seems to me ya’ll have the cart before the horse. So where do you think the electricity comes from to recharge your magical EVs? If there is a massive move to EVs you will need new power plants to supply the electricity to recharge. Coal? Nuclear? Which has waste that can last 10s of thousands of years. Think ground water. Natural gas? Seems counter productive to me if you can’t come up with a different energy source. But that’s just me.

  15. Mike

    “Proposed recycling projects could help meet demand. Redwood Materials projects its recycling facility, currently under construction in Nevada, will supply cathode and anode materials to support one million electric vehicles per year by 2025.”

    …you can’t recycle what is not yet built

  16. Mark A Oglesby

    A waste of space is this article which ends with “But for the U.S. to hit those goals, electric vehicles will have to replace fossil-fueled vehicles by the millions.” This will never happen as the ecological damage created by the extraction of minerals would become catastrophic. In short, a better way much be found.

    (1) Simply return to biofuels as was the original fuel when Henry Ford began mass production of his vehicles. But what took place, Rockefeller convinced Ford to switch to fossil fuels which was easily accomplished with a few minor adjustments. Those adjustment could be reversed, and the present fossil fuel infrastructure updated. Automobiles updated as well. Very little wasted energy in this transformation. And there’s an added benefit: The growing of plants (which by the way produce oxygen while taking in carbon dioxide, let us suggest, the massive growing of HEMP which takes very little water as it grows like weeds.

    (2) Mass transit implemented here in the U.S. Look at what China has done here. We must replace air travel with trains, China’s invested massively in this endeavor and it’s paying off. The U.S. can do it as well. Oh, but the cost! What to do? From the waste of space article: “an unprecedented US$370 billion in energy and climate programs over the next 10 years.” A drop in the bucket considering that we are (when you include the security state apparatus) spending over a $trillion annually on the Military Industrial Complex. Besides, we CANNOT afford not to put our money (which by the way is infinite, its’s just numbers on a computer screen whereas physical resources are finite) into this endeavor.

    (3) And this must begin immediately! Rid ourselves of this consumer culture which is killing our planet and its vital resources. This is so easily accomplished.

    (4) Three things to think about:

    (a) We must change how we manage our economies, how we view money.

    (b) We must redefine work, an absolute must. We can no longer think of full employment, and more to this, we need to understand that we don’t need everyone working every day. Let us begin to explore our own humanity instead of constantly on the move rushing to work to make “Stupid Ass Scratching Stuff” (as I call it in my book: ‘Zen & The Art of Masturbation: Experience the End of the Aeon at The Spank the Money Cafe’ It’s a tale about online retail at the global corporation (a fictional company, it’s really which we really don’t need to fulfill ourselves as persons (personally, I’ve always hated the term ‘Fulfillment Centers’ ( warehouses) because the very notion of a produce actually fulfilling the human person’s absurd. By the way, I spend 7yrs in those Amason warehouses, 5 as a Picker, and the “Stupid Ass Scratching Stuff I picked day in, day out, well most of it was basically redundant, a waste of time and important resources we need for the basics of physical life.

    (c) I Cannot put this in the most imperative term: We absolutely must change our political system if we are to survive as a nation, thrive as a species. To change a and b, a new way of administration must come forth. And it will only happen if We the People revolt against the present corrupt system which is collapsing before our very eyes. We are on a path to destruction, and if We the People do not act, this nation, and by extension, this planet will not survive.

    (5) Can this be done? Quite easily I’m afraid. Peaceful non-cooperation via non-violent means. First, refuse to cooperation with the existing system which is in fact, killing us. Next, in the millions, tens of million: Refuse to work! Refuse to pay any debts (personal debts to friends and/or family notwithstanding)! Refuse to pay any and all RENTS, mortgages included! Refuse to consume with the exception for life enabling consumption. Again, refuse to cooperate.

    In short, we are, as the song suggests: “On the highway to Hell…” I live in an area of constant triple digit temperatures from June into October. 30 yrs I’ve been here, and it always hasn’t been this way. The last 4-5 yrs we’ve been experiencing this change as has our fine organic vegetable garden (in its 23rd season) which is suffering terribly!

    1. Yves Smith Post author

      You ask to be taken seriously with this? This is naive hopium and a refusal to give up modern lifestyles.

      First, biofuels are negative for the environment and release carbon:

      As more and more people begin to accept the dire reality of the climate crisis, calls to increase reliance on biofuels over fossil fuels are growing. However, biofuels are often not the climate-smart or environmentally friendly solution they appear to be at first blush. Rather, meeting the increasing demand for today’s biofuels requires transforming biodiverse uncultivated areas into farmed land with multiple and substantial immediate and long-term adverse climate and environmental impacts.

      Immediately, by turning over the soil and converting previously uncultivated land, producers release generations of stored carbon into the atmosphere. Preparing land for cultivation has substantial upfront impacts, as the process of agrification eliminates trees, unearths grasslands, and tills deep into the soil. Uncultivated areas maintain a legacy of carbon stored in the roots and bodies of native plants and deep within the soil. Therefore, converting the land to produce biofuel sources such as corn and soy releases considerable carbon into the atmosphere. For example, between 2008 and 2012, the conversion of land to grow crops for biofuel released an estimated equivalent of the annual carbon dioxide emissions of 34 coal-fired power plants or 28 million cars. In addition to releasing the stored carbon into the atmosphere, converting land also immediately changes the landscape so that it can no longer sequester and store new carbon. In a warming world where we need every tool at our disposal to tackle the climate crisis, we cannot afford to lose natural mechanisms for carbon sequestration.

      While not all land used to produce crops for biofuels is newly converted, even displacing other crops for biofuels can have similar consequences. Food or animal feed that has been previously grown on land now used for biofuel feedstock will – absent a change in demand – have to be grown somewhere else, and that somewhere else often involves land conversion.

      In addition to the climate harm caused by biofuel production, the massive production of corn destroys native habitats and poses a significant threat to biodiversity….

      Second, even the current 10% ethanol gas is bad for cars. I switched to pure gas and was shocked at the improvement in miles per gallon, much > the 3-4% improvement I expected.

      The environmental cost of replacing current cars with ones that would be happy on ethanol would be large.

      Third, your comment on rail in the US is silly. Have you looked at US maps? Did you bother working out how many homes and commercial buildings would have to be torn down? Pray tell, what is the environmental cost of that? And that’s before getting to the fact that in many cities, there’s no good place to put a new rail station that would accommodate high speed rail. That’s why the SF-LA one was a bust despite the high flight traffic on that route making it seem to make sense. There’s no attractive place to put the LA station and thus traffic would not be very high.

      What we need is radical conservation. Nothing else will do at this point.

      1. Grumpy Engineer

        Regarding biofuels… Several years ago, I saw an analysis of how much cropland would be required for soybean oil to keep a modern 500 MW dual-fuel combined-cycle gas turbine operating 24 hours a day. The number was horrifying. Something like 15 million acres.

        If we tried to convert of the nation’s coal- and gas-fired power stations to biofuels, we’d consume the nation’s arable land twenty times over. Biofuels aren’t a good solution for automobiles or power generation. Cropland should be used for growing food.

  17. FDW

    Actually, Califnornia HSR is not dead:

    And if anything, it’s actual first 1st phase is about to open. With the ongoing Caltrain Modernization Project, the HSR project is enabling the Bay Area to undertake it’s biggest transportation investment since the original BART system.

    On the other hand, Metrolink in Southern California has been trating HSR as if doen’t exist. But the thing about CAHSR is that there’s not going to be one station in the LA area, but more like 1/2 dozen different stations.

  18. Steven

    Given resource constraints on the production of batteries, this bill may be worse than nothing. What is glaringly absent is a requirement for recipients of EV credits to actually earn them by purchasing cars with bidirectional charging (BC), the capability to supply power to a grid as well as draw power from it. We are NOT talking about vehicle-to-grid (V2G). That would require 50 state utility commissions infested with lobbyists from their respective utility companies.

    The only EV with which I am familiar that comes close to supplying this capability is the Ford Lightning pickup. If people who owned one only took care of themselves with say vehicle to home (V2H) while the power grid was struggling, they would be performing a community service. There are lots of possibilities for using the power stored in EV batteries so rather than V2G or V2H, let’s call it V2X, i.e. vehicle-to-you-name-it.

    None of the automakers are without sin but Tesla’s Elon Musk belongs at the top of the list. His engineers have for years asked to include BC with the EVs Tesla is selling. But Musk has refused, most likely because it would interfere with the sales of Tesla’s PowerWalls and grid-scale batteries. Ford gets an honorable mention. It has proven it knows how to do BC and should at least offer it as an option across its entire EV product line, including especially the Mustang MachE.

    As a matter of public policy, denying both automakers who refuse to offer BC as an option and customers who refuse to take advantage of it makes a lot of sense.

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