The U.S. Treasury Department’s guidance on battery sourcing requirements for the electric vehicle tax credits will result in more vehicles being powered by lithium-ion batteries, instead of more traditional gasoline and diesel engines. This change could increase the cost of purchasing an electric vehicle, but it could also make the vehicles themselves more environmentally sustainable and less reliant on finite resources like oil.
There are a lot of critical minerals that must be sourced from the U.S. or a country with which it has a free trade agreement in order qualify for the $3,750 EV credit in the Inflation Reduction Act. Some of these minerals include lithium, cobalt, copper, iron ore and nickel. It’s important to take into account where these materials come from when making your purchase decision to make sure you’re getting your full EV credit potential.
Some EV-makers are concerned that the government’s guidance on battery sourcing may be too strict. This makes it difficult for them to buy the batteries they need, which could hold back the rise of electric cars. Some believe that giving EV-makers a grace period will let them figure out a more flexible solution.
EVs don’t just stand to lose tax credits this week, but they could also see their range shrink or price tags go up. The Trump administration is expected to release guidance Friday that will redefine key terms like “processing” and “extraction” in order to disqualify many electric vehicles from the tax credit program. If this happens, EVs may become more expensive and less accessible, as more motorists switch over to cheaper gasoline-powered vehicles.
The battery sourcing rules are important because they will help the U.S. decrease its reliance on China for batteries. While most automakers have been reorganizing supply chains and bringing more processes onshore since COVID, not all will have had the chance to completely upgrade their battery sourcing in time to meet both the Treasury Dept requirements and increased demand for EVs. The rules also apply to small businesses, which is a bonus for American companies as it allows them to compete with larger Chinese rivals who can afford better resources and a wider reach into key market categories such as automotive lithium ion batteries.
Despite its large share of the world market, China has had to confront some challenges affecting the production of lithium-ion batteries. One such challenge is environmental degradation and pollution caused by the manufacturing process. Another is a lack of skilled workers in the country to handle this rapidly expanding industry. In spite of these challenges, China continues to lead in terms of battery production capacity and it may remain so for some time due to its advantages over other countries, such as cost-effective resources and a mature industrial infrastructure.
The Biden administration seems to believe that the tax incentive will result in more EVs sold as automakers reorganize their supply chains in order to meet the stringent requirements of the Internal Revenue Service. In light of China’s enormous lead over the US in EV sales, this could be a risky business decision for some automakers, but nonetheless one that is likely to bring about incremental progress on this cutting-edge technology.
The Treasury Department’s update to the vehicle classification standard means more Tesla, Ford, General Motors and Volkswagen EVs are now eligible for up to $7,500 tax credits. However, once the battery sourcing guidance is released later this year, these vehicles may lose all or part of their tax benefits. This could lead consumers to choose models that were previously ineligible for the subsidies in order to take advantage of them.
