The Biden administration released strict new guidelines on Friday that set limits on Chinese content in electric vehicles in order for them to qualify for up to $7,500 in federal tax credits. The move aims to shift reliance on China for EV batteries and critical minerals used in battery production, but has faced criticism from automakers and questions around impacts on EV adoption.
New Rules Set 50% Cap on Chinese Battery Components Starting 2023
Under the newly released guidelines, electric vehicles will need to have 50% or less Chinese components in their battery starting in 2023 in order to receive the full $7,500 tax credit amount. That threshold will drop to 40% for battery components from China in 2024 and 30% in 2025. The rules apply to both commercial EVs as well as consumer models.
The battery regulations are the most stringent component of the guidelines, which were developed by the Treasury Department based on directives in the Inflation Reduction Act passed by Congress in August. Batteries make up the most expensive part of an electric vehicle, so limiting Chinese content is seen as essential to shift EV manufacturing away from China.
"We’re going to make sure that any tax credits to buy electric vehicles don’t apply if those vehicles are made in China with Chinese technology," said Mitch Landrieu, senior White House aide overseeing EV policy implementation.
In addition to battery regulations, the guidelines also set limits on Chinese content for critical minerals and components used in EV manufacturing:
- Critical minerals used in batteries will need to be extracted or processed outside of China or a country aligned with China in order for EVs using those batteries to qualify for the full tax credit.
- Specific EV components like motors and steel cannot have over 50% Chinese content in 2023, dropping to 45% in 2024 and 40% in 2025 to receive the maximum tax credit amount.
The rules allow some flexibility for automakers, keeping open the possibility for vehicles to still qualify for partial tax credits even if they exceed the Chinese content thresholds. But meeting the guidelines poses a significant challenge to an auto industry heavily reliant on China for materials, parts and assembly capacity for electric vehicles.
Automakers Voice Concerns Around Feasibility of New Standards
Automakers and industry groups responded to the release of the tax credit guidelines with a mix of support and concerns, focusing heavily on the feasibility of meeting the strict Chinese content limitations.
“We are concerned that the US is heading in the wrong direction on EV tax credits by limiting vehicles for consumers and companies based on stringent sourcing requirements that will be challenging to meet,” said Chris Reynolds, chief administrative officer for Toyota Motor North America.
General Motors and Ford both stated they expect many of their upcoming EV models to meet the required standards to qualify for the full $7,500 tax credit amount. But they cautioned that supply chain shifts cannot happen overnight, and strict requirements could hamper EV adoption if credits are limited.
The National Automobile Dealers Association (NADA) emphasized that overly rigid regulations could “severely limit” the EV options available to most consumers and deal critical damage to achieving broader electrification goals. They urged flexibility in the rules to account for market realities. Other experts point out that key EV battery materials and components will remain heavily reliant on Chinese supply chains for the foreseeable future regardless of sourcing mandates.
Tax Credit Phase Out Still Set for Early 2023 Despite Delayed Guidelines
A key detail surrounding the release of the EV tax credit guidelines is that they do not impact the existing phase out schedule for credits on vehicles from several major automakers. Rules set under previous tax credit regulations begin cutting some credits in half starting January 1, 2023 based on manufacturers hitting an EV sales cap.
GM and Tesla already hit the cap earlier this year, meaning none of their vehicles will qualify for the $7,500 full tax credit amount starting in 2023. Instead they will be limited to $3,750 in credits for several more quarters based on the prior regulations. So the newly released guidelines aiming to shift supply chains and limit Chinese content will not benefit two of the largest EV producers in the short-term.
“The EV tax credit rules released today align with our expectations and do not change our plans and projections for EV adoption,” said a Tesla spokesperson.
Many experts say limiting credits for the largest EV makers will dampen broader adoption of electric vehicles, reducing the environmental benefits. And it remains to be seen if new entrants will be able to make up the difference fast enough to hit national emissions reduction goals.
Ongoing Efforts to Challenge Chinese Dominance in Critical Mineral Supply Chains
Parallel to the strict new EV tax credit rules, the Biden administration is pursuing additional policies aimed at securing domestic critical mineral resources essential for advanced batteries. Reducing reliance on Chinese supply chains for those key materials is seen as a national security priority.
In October, the Department of Defense released a new strategy focused on significantly increasing production of critical minerals for defense and commercial industries. It identifies risky reliance on rival nations – especially China – for over 75% of US lithium and graphite needs among other key minerals. Goals aim to partner with ally nations to supply 70% of certain defense critical minerals by 2030 and 80% commercial needs for clean energy transition materials in the same timeframe.
New domestic mining partnerships and processing projects are also underway, aligned with directives in the Inflation Reduction Act that included over $10 billion in grants and loans to boost critical mineral production and recycling capacity in the US. Expansions span lithium, cobalt, nickel, graphite and manganese resources needed for high-tech batteries. How quickly these projects can begin delivering significantly higher volumes remains uncertain.
“We have an immense opportunity to produce critical minerals essential for our future right here in the United States,” said US Secretary of Energy Jennifer Granholm recently announcing new loan guarantees for a US lithium project.
In the wake of the strict new EV tax credit rules, experts expect automakers will aggressively pursue partnerships with domestic mines and processing facilities delivering battery materials not linked to China. But supply chain shifts at scale will take years to impact most electric vehicles hitting dealer lots.
Republican Opposition and Questions Around Environmental Justice Impacts
As the Biden administration races to implement major policies aimed at positioning the US as a leader in electrification, EVs and clean energy, opposition from some Republican lawmakers continues mounting. Critical mineral mining expansion plans in particular face pushback.
Senator Joe Manchin from West Virginia – a pivotal centrist vote in Democratic spending packages – lashed out at the tax credit rules as supportive of China and limiting options for US consumers. He vowed to reverse the guidelines when Republicans hold a majority in Congress.
“The Biden Administration issued guidance that will ultimately do more to help China than boost EV production in the United States,” Manchin said in a statement. He urged requiring country-of-origin labeling for EV tax credits so US consumers are aware of Chinese supply chain dependence.
Some environmental and environmental justice groups have also raised concerns around domestic mining projects the Biden administration is championing, claiming they often impact marginalized communities the most despite promises of high labor and environmental standards.
Recent research found that Indigenous populations live within 50 miles of over 75% of critical mineral projects in the US and Canada. Additional assessments of small town impacts, water pollution risks and more are still needed for major expansions tied to US battery metals goals. Without proper safeguards and community engagement, environmental injustices could still result despite intentions to counter China’s supply chain dominance.
Uncertain Impacts on Overall US EV Adoption Goals
Perhaps the biggest open question around the administration’s new EV tax credit rules limiting Chinese content is how the restrictions could impact broader US adoption of electric vehicles. Some analysts forecast the regulations leading to higher EV costs and fewer qualifying options may dampen consumer interest and slow the transition from gas vehicles.
EVs make up under 5% of total light duty vehicle sales in the US currently. To meet national decarbonization targets, some experts estimate 50-70% of sales must be electric by 2030. Whether overly strict domestic sourcing requirements help or hinder momentum towards those goals is disputed.
“The Biden administration has effectively tied American pocketbooks to political interests that supersede public opinion and practicality,” said Michelle Krebs, executive analyst for Cox Automotive. “Limiting access to the tax credit has the potential to significantly slow EV adoption.”
Proponents argue that supporting domestic manufacturing, critical mineral production and supply chain resiliency is essential even if subsidies are limited in the short term. But absent clear signals that new US mineral and battery plants will materialize fast enough to meet demand, questions around feasibility and real climate impacts persist.
For consumers and companies hoping to access EV tax credits in 2023, intense scrutiny of battery component supply chains and country of origin seems inevitable based on the stringent new rules. Legal challenges are also anticipated from groups alleging violations of international trade commitments. Ongoing debates in Congress also leave the door open to amendments revising or rescinding sections of the guidelines before most impacts are felt.
How the new regulations will shape America’s emerging electric vehicle landscape remains highly uncertain. But the scale and pace of change required leaves little room for missteps according to many stakeholders if decarbonization goals are to be achieved.
What Next After Strict New EV Tax Credit Rules?
- Automakers expected to aggressively pursue partnerships for battery materials not linked to China, though supply chain shifts will take years. Critical mineral projects in the US, Canada, Australia and other nations likely to receive heightened interest and investment.
- Republican opposition likely to continue questioning feasibility and fairness of Chinese supply chain restrictions, potentially threatening legislative changes reversing portions of the strict tax credit rules.
- Legal challenges anticipated from some manufacturing groups around violations of international trade commitments and World Trade Organization compliance questions.
- Concerns may grow around domestic mining expansions needed to meet battery metals demand and prevent environmental injustices impacting marginalized communities near new projects.
- If new US mineral and battery production capacity fails to come online quickly, shortages and reliance on Chinese supply chains could still hamper the growth in affordable EV options qualifying for tax credits in the short term – slowing adoption rates.
- Ongoing lack of transparency around supply chain origins and country specific content in complex products like EVs will complicate compliance and consumer purchase decisions around qualifying for maximum federal tax incentives.
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