On Friday, the Biden administration introduced regulations for tax credits for electric vehicles that restrict Chinese imports. However, these rules could potentially hinder the shift away from fossil fuels in the U.S. by reducing the number of eligible cars.
The recently released instructions for accessing tax credits represent the difficult challenges the Biden administration has faced in promoting its ambitious climate plan and reducing reliance on Chinese control of batteries and vital minerals essential for the shift to electric vehicles.
The regulations state that a vehicle will not be eligible for the credit if any of its suppliers have connections to Beijing, such as manufacturing parts in China or having less than 25 percent of board seats controlled by China. In some cases, even a US supplier using licensed Chinese technology could be excluded from the credit based on the updated regulations.
Several months ago, the Treasury Department implemented a regulation that restricted many European, Japanese, and South Korean car manufacturers from receiving a tax credit for domestic manufacturing. Currently, only about 22 electric and plug-in hybrid vehicles are eligible for this credit, which is less than one-fifth of the total number of models available for purchase.
It is uncertain how many of the cars will still be eligible once the new regulations take effect in January. These strict rules are a success for those who oppose China’s influence and aim to reduce U.S. dependence on the country. However, car manufacturers like Ford, who had intended to use Chinese battery technology for a factory in Michigan, will have to reconsider if they can still sell their cars with the tax incentive.
Encouraging the use of electric cars among Americans is a crucial aspect of President Joe Biden’s environmental plan, and the tax credit is his primary tool to achieve this goal. This credit can reduce the cost of an electric car by as much as $7,500, opening up affordability for a wider group of potential drivers.
5-year, $867 billion farm bill.
However, during the passing of last year’s 5-year, $867 billion farm bill, Democrats in Congress enforced a series of increasing limitations on domestic content.Inflation Reduction Act
Intended to exclude China from the American electric vehicle supply chain.
Although China remains the primary supplier for essential components of vehicles, such as batteries, government officials are confident that automakers will comply with the new regulations. They pointed out the significant investments being made in American manufacturing facilities, which amount to billions of dollars.
The Deputy Treasury Secretary, Wally Adeyemo, informed reporters that car manufacturers have made necessary changes to their supply chain in order for buyers to qualify for the credits. He also added that these adjustments take time, but companies are committed to investing in them and Americans are purchasing these vehicles.
The regulations also provide some leeway that car manufacturers had requested, allowing for a two-year gradual implementation of the rule on specific hard-to-track battery materials used in their electric vehicles.
The strategy of the Biden administration received swift approval from Michigan Democrats, but was criticized by Republican lawmakers who are tough on China.
Rep. Mike Gallagher
The chairman of the Select Committee on the Chinese Communist Party (R-Wis.) expressed concern over new regulations that could result in American tax dollars supporting Chinese companies involved in trade violations and forced labor.
The rule’s offer of olive branches to automakers was met with criticism from one of the primary authors of the credit, Democratic Senator.Joe Manchin
The Congressman from West Virginia stated on Friday that he plans to propose a Congressional Review Act resolution to revoke the rule and support a legal challenge against it.
Manchin stated that the current administration is once again attempting to come up with loopholes and postponements that allow China to profit at the expense of American taxpayers. He expressed his determination to use all means available to overturn this illegal and dishonorable proposed regulation and safeguard our energy independence.
But Sen. Debbie Stabenow
(D-Mich.) commended the administration for taking steps to encourage the adoption of electric vehicles within the limitations of the law.
The guidelines were also met with approval from industry representatives.
Albert Gore III, executive director of the Zero Emission Transportation Association, stated that the rule is carefully implemented and designed to be feasible for the industry.
Gore stated that he anticipated the regulation to decrease the amount of models qualified for the federal credit, albeit temporarily. He also acknowledged that no interpretation could guarantee the retention of all currently eligible models on the list.
According to Gore, when implementing new requirements, it is common for some models to be eliminated due to the complexity of supply chains. This is a normal and anticipated occurrence, as it is not possible to immediately make significant changes in supply chain processes.
The CEO of the Alliance for Automotive Innovation, John Bozzella, stated that the regulations have achieved a practical equilibrium and will guarantee that the pool of qualifying vehicles will not disappear entirely by 2024, which was a major concern.
General Motors said in a statement that it continues to evaluate the rule but believes it is “well positioned to maintain the consumer purchase incentive for many of our EVs in 2024 and beyond.”
According to a statement from Ford, the regulations have been described as “thorough and comprehensive.” The company is currently examining the impact of these rules on their vehicles and the battery park located in Michigan.
In a statement, Jennifer Safavian, the president and CEO of Autos Drive America, a trade association representing foreign automakers, expressed gratitude for the “flexibility” offered in the guidance, allowing car manufacturers to utilize the credit.
Safavian stated that American car manufacturers are currently focused on developing local supply chains and expanding their sourcing options. However, this transition will require a significant amount of time.
In January, the United States will implement new regulations that are crucial for the adoption of electric vehicles. The three biggest American car companies – Tesla, General Motors, and Ford – have all reduced their targets for EV production due to high interest rates and declining consumer interest. Additionally, Republicans are increasing their criticism of President Biden’s efforts to promote EVs in Congress and during the presidential race.
Walking a tightrope
According to the Inflation Reduction Act, car manufacturers cannot obtain battery components or crucial minerals from any foreign entity classified as a “concern” for vehicles that qualify for the tax credit. This restriction will take effect in 2024 and 2025 for different parts. The countries listed in the law include China, Russia, Iran, and North Korea.
However, legislators have tasked the administration with the difficult job of determining which companies in those nations, along with their joint ventures and American subsidiaries, will be affected by the ban.
American car manufacturers and the electric vehicle sector asserted that the guidance should provide some leeway. This is because despite investing large sums of money in expanding their presence in the United States to comply with domestic content regulations, they have not had sufficient time to completely disentangle their supply chains from China.
Both Republican and Democratic lawmakers who are advocates for domestic industries and have strong opinions about China have expressed their opposition to the proposed plan, urging for a more stringent approach to completely eliminate China’s involvement. This view is shared by both Republicans and Senator Manchin.
The Department of Treasury was cautioned.
There has been a recent push to not allow car manufacturers to continue depending on suppliers from China.
The guidance from the Treasury should clearly state, in the most thorough manner possible, that foreign entities of concern cannot receive taxpayer subsidies through any possible means of organization. This has been stated by the Chair of the House Ways and Means Committee.Jason Smith (R-Mo.)
I sent a message to the Treasury Department. in September.
In the end, the administration aimed to find a middle ground by providing a fairly rigid interpretation of the businesses that would face the prohibition, while also granting car manufacturers some leeway in enforcing the ban on certain battery materials with unclear origins.
On Friday, the Treasury and Energy Departments released two related proposals to clarify the provision.DOE’s rule
defines a “foreign entity of concern”Treasury’s rule
Explains the application of the EV tax credit for automakers.
number of other commercial and industrial equipment that uses energy and water.
The Department of Energy regulation also covers various types of business and industrial machinery that utilize both energy and water.$6 billion grant program it is administering to boost domestic battery production. That program, established by the 2021 bipartisan infrastructure law, discourages applicants from sourcing battery materials from a “foreign entity of concern.”
DOE’s definition of “foreign entity of concern” closely follows the interpretation of the same phrase by the Commerce Department in the CHIPS and Science Act of last year, as anticipated by many observers in the EV industry. This regulation prohibits suppliers from receiving federal incentives if 25% or more of the company’s stock, voting shares, or board seats are owned by individuals or businesses from countries such as China.
This is more stringent than the 50% limit found in other sections of the Internal Revenue Code. Additionally, some individuals aligned with the automotive industry stated that the 25% definition alone would probably exclude numerous electric vehicle models from receiving the credit.
However, the Department of Energy (DOE) also expanded on the CHIPS definition by stating that a company may be deemed a foreign entity of concern if it enters into a technology licensing agreement with a Chinese firm and the Chinese company has “effective control” over production.
Some Republican lawmakers, like Sen. Marco Rubio (R-Fla.), had
I urged the Treasury to incorporate licensing agreements.
The stipulation aims to specifically address Ford’s arrangement to acquire advanced battery technology from the leading battery producer in China.
Proposed manufacturing facility in the state of Michigan..
Ford has emphasized that their agreement with Contemporary Amperex Technology Co. will not result in any taxpayer funds being returned to Beijing. They assert that this partnership is crucial in order for them to be the first car company to produce advanced lithium, iron, and phosphate batteries in the US, instead of importing them from China.
An unnamed official from the senior administration gave a statement to reporters regarding the rule, stating that the Department of Energy has not assessed any particular plan or situation involving automakers for qualification under the licensing rule. However, Ford has declared that they will possess and manage the Michigan facility, potentially exempting them from meeting the criteria for “effective control” as outlined in the interpretation.
Gore commended DOE’s method of handling licensing agreements by differentiating between a simple payment for using a patented technology and a collaboration that resembles a joint venture.
According to Gore, simply licensing IP does not automatically classify the licensee as a foreign entity of concern. He believes it would be a mistake to impose a limitation on this industry that is not applied to others.
Automakers receive some reprieve.
The proposed regulation from the Treasury Department imposes further obligations on car manufacturers to adhere to the restrictions set by the Department of Energy. These companies will be responsible for physically tracking battery cells throughout their supply chain to ensure that no foreign entity of concern is involved, and they will face harsh consequences if they attempt to circumvent the regulations.
However, the proposed rule from Treasury also includes provisions to aid car manufacturers in meeting the Department of Energy’s definition in the near future. This includes a temporary exemption until 2026 for specific low-value battery minerals that are challenging to track back to their original sources.
Exceptions known as “de minimis” are frequently used in trade policies, seen in agreements such as the North American Free Trade Agreement and its recent replacement, the United States-Mexico-Canada Agreement during the Trump administration.
Bozzella referred to the exemption as “meaningful and prudent.”
“He stated that even if an electric vehicle meets all the necessary criteria for IRA eligibility, it could still be disqualified if it contains even a small amount of a crucial mineral or component from a foreign entity of concern.”
made it clear he would not support a $15 minimum wage
However, Manchin was upset by the short-term delay, as he had previously stated that he would not back a $15 minimum wage.
threatened to file a lawsuit in retaliation over Treasury’s rules for the rest of the credit.
Manchin stated that the Biden administration is once again violating the law in their attempt to enforce a bill that was unable to be passed, specifically with regards to the proposed Treasury regulations concerning Foreign Entities of Concern.
The statement from Robbie Diamond, the creator and chief executive of the advocacy organization SAFE, expressed concern that the recent guidance does not fully guarantee the maximum impact of these credits on U.S. and allied production, despite their push for a strict interpretation of the regulation.
2019 GDP and said “The gross domestic product (GDP) of China was $14.34 trillion in 2019.
In 2019, China’s gross domestic product (GDP) was $14.34 trillion, as stated by Diamond.
New limitations have been placed on the export of essential minerals.
Beijing’s efforts to exploit their market dominance are being seen as attempts to weaponize it.
The mining industry in the United States also advocated for a strict understanding. Conor Bernstein, the vice president of communications for the National Mining Association, stated on Friday that this regulation is a significant advancement in tackling America’s issue with China.
However, Bernstein suggested that the Biden administration will need to take additional measures to strengthen domestic mining and processing in order to develop U.S. supply chains.
The latest changes made on Friday have a major impact on the EV tax credit, which was first outlined in March. Originally, only 14 models were eligible, but that number has increased to over 20 in recent months, including well-known options such as the Tesla Model Y and Model 3, as well as the Chevy Bolt.
The government is anticipating that a future modification to the regulations will significantly boost the credit. Starting in January, individuals who purchase EVs can opt to receive the credit as an immediate rebate or cash at the time of purchase, instead of having to wait until tax season to claim it.
The Internal Revenue Service (IRS) also mandates that there will be a stricter domestic sourcing requirement for car manufacturers beginning in January. This means that car manufacturers must increase the production of their battery components and crucial minerals for eligible vehicles in the US or its trade partners, which may result in more vehicles being disqualified from receiving the credit.
This report was contributed by Tanya Snyder.