Battery procurement guidelines could reduce EV tax credits

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

The proposed EV credit guide included in the Inflation Reduction Act states that 50% of the value of battery components in North America must be manufactured or assembled at $3,750 for vehicles to qualify, which is half of the total credit . To get the rest of the credit, 40% of the critical minerals must come from the US or a country with which it has a free trade agreement.

The battery procurement guidelines were supposed to go into effect January 1, 2023, but in December the Treasury decided to wait until March to give some EV manufacturers a grace period to comply.

The Treasury Department is expected to release its forecast on Friday, and while the Reuters report doesn’t say exactly what that will be, we can expect the full forecast to come out, meaning many EVs will lose or have their tax credit reduced. The Treasury Department will also define key terms such as processing, extraction, recycling and free trade agreements.

The battery procurement rules are designed to help the US become less dependent on China for batteries. While most automakers have reorganized supply chains and implemented more processes since COVID, not all have had the opportunity to fully upgrade their battery inventory in time to meet Treasury Department requirements and increase demand for electric vehicles .

According to data from Benchmark Mineral Intelligence, a market research firm, China currently produces 81% of the world’s cathodes, 91% of the world’s anodes and 79% of the world’s lithium-ion battery production capacity. In comparison, the US has only 0.16%, 0.27% and 5.5% market share respectively.

While the US and most of its free trade partners have lagged woefully behind China, the Biden administration has said it believes the tax credit will lead to more EV sales over time as cars grow. the source told Reuters.

In February, the Treasury Department updated the vehicle classification standard to redefine what makes a vehicle a sedan, SUV, crossover or pickup. The change made more electric vehicles from Tesla, Ford, General Motors and Volkswagen eligible for tax credits of up to $7,500. These vehicles could lose some or all of their tax credits once battery procurement guidelines are released.