Battery sourcing guidance might slash EV tax credits

UPDATE: Tesla tweaks Model 3 page of U.S. website encouraging buyers to take delivery now in anticipation of reduced tax incentives by March 31.

The U.S. Treasury Department’s guidance on battery sourcing requirements for the electric vehicle tax credits will result in fewer vehicles being eligible for full or partial credits, reports Reuters, citing an unnamed U.S. official.

The proposed EV credit guidance as included in the Inflation Reduction Act says that in order for vehicles to qualify for $3,750, which is half of the total credit, 50% of the value of battery components must be produced or assembled in North America. To get the remainder of the credit, 40% of critical minerals must be sourced from the U.S. or a country with which it has a free trade agreement.

The guidance on battery sourcing was meant to kick in on January 1, 2023, but in December the Treasury Dept. decided to hold off until March to give some EV-makers a grace period to meet the requirements.

The Treasury Dept. is expected to share its guidance Friday, and while the Reuters report doesn’t state exactly what it will be, we can guess that the full guidance will kick in, meaning many EVs will lose tax credits or see them cut. The Treasury Dept. is also expected to define key terms like processing, extraction, recycling and free trade deals.

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The battery sourcing rules are aimed at helping 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.’s requirements and the increased demand for EVs.

China currently makes 81% of the world’s cathodes, 91% of the world’s anodes and 79% of the world’s lithium-ion battery production capacity, according to data from Benchmark Mineral Intelligence, a market research firm. For comparison, the U.S. has just 0.16%, 0.27% and 5.5% market share, respectively.

Despite the U.S., and most of its free trade agreement partners, being woefully behind China, the Biden administration has said it thinks over time, the tax credit will result in more EVs sold as automakers reorganize supply chains to meet the IRA rules, the source told Reuters.

In February, the Treasury Dept. updated the vehicle classification standard to redefine what makes a vehicle a sedan, an SUV, a crossover or a wagon. The change made more Tesla, Ford, General Motors and Volkswagen EVs eligible for up to $7,500 tax credits. Those vehicles stand to lose some or all of the tax credits once the battery sourcing guidance is out. In fact, Tesla on Wednesday evening updated the Model 3 page on its U.S. website to reflect this, saying the tax credit is expected to be reduced for the vehicle by March 31 and encouraging buyers to “take delivery now.”