President Joe Biden signed a far-reaching account climate, energy and health care on Tuesday that an unprecedented $370 billion will be invested in energy and climate programs over the next 10 years, including incentives to expand renewable energy and electric vehicles.
Rapid and widespread adoption of electric vehicles will be essential for the United States to meet its climate goals. And the new accountincluding a large number other health and tax-related provisionsaims to encourage people to trade in their gasoline-powered cars for electric vehicles by offering tax credits of up to $7,500 for new electric vehicles and up to $4,000 for used electric vehicles through 2032.
But there’s a catch, and it could make it difficult for most EVs to qualify for the new incentive.
The bill requires new electric vehicles to meet strict procurement requirements for critical materials, battery components and final assembly to qualify for the tax credits. While some automakers, such as Tesla and GM, have well-developed domestic supply chains, no electric vehicle manufacturer currently meets all of the bill’s requirements.
Building a domestic EV supply chain
At first glance, the revised EV tax credits seem like a smart move.
Existing US Policy allows credits for the first 200,000 electric vehicles a manufacturer sells. those credits helped jump-start EV demand. But industry leaders, including Tesla and GM, have already reached that limit, while most foreign automakers’ vehicles are still eligible. The bill would remove the cap for individual automakers and extend the tax credits through 2032 — for any vehicle that meets procurement requirements.
Straight away, China dominates the global supply chain for materials and lithium-ion batteries used in electric vehicles. This is not an accident. Since the early 2000s, Chinese policymakers have aggressive policy adopted that have supported advanced battery technologies, including investments in mining, materials processing and manufacturing. In my new book, I discuss how China got a head start in the race to a clean energy future. Recharged: A History of Batteries and Lessons for a Clean Energy Future.
Senator Joe Manchin, the West Virginia Democrat who blocked previous attempts to get these measures through the deeply divided Senate, said he hopes the requirements will help scale the US supply chain for critical minerals.
The EV incentives would complement other US policies aimed at boosting domestic EV production capacity. These include $7 billion in grants to accelerate battery supply chain development, allocated in the Infrastructure Investments and Jobs Act of 2021 and a $3 billion expansion of the Advanced Vehicle Manufacturing Loan Program, included in the current bill, formally known as the Inflation Act.
The problem is that the Inflation Reduction Act’s Sourcing requirements are coming online so quickly, starting in 2023, and rising so quickly that the plan could backfire. Rather than expanding the adoption of electric vehicles, the policy could make nearly all electric vehicles ineligible for the tax breaks.
Even Tesla’s Gigafactory Relies On China
The bill excludes incentives for any new vehicle containing battery materials or components extracted, processed, manufactured or assembled by a “foreign entity of concern” — a category that includes China.
According to Benchmark Intelligence, a market research firm that tracks the battery industry, China currently controls 81% of global cathode production capacity, 91% of global anode capacity and 79% of global lithium-ion battery production capacity. In comparison, the United States has 0.16% of the production capacity of cathodes, 0.27% of the production capacity of anodes, and 5.5% of the production capacity of lithium-ion batteries.
Even the most advanced battery factories in the US, such as Tesla’s Nevada Gigafactory, currently rely on materials processed in China. Despite Ford’s plans to expand its domestic supply chain, most recent offers are for purchasing batteries from the Chinese manufacturer CATL.
In addition to excluding materials and components sourced from China from 2023, the bill also requires a minimum percentage of materials and components in batteries to be sourced domestically or from countries with which the US has a fair trade agreement, such as Australia and Chile. The threshold starts at 40% of the critical mineral value in 2023 and increases to 80% in 2027, with similar requirements for battery components.
If a manufacturer does not meet these requirements, his vehicle will not be eligible for the tax credit. Whether the Ministry of Finance will come up with exemptions remains to be seen.
While EV manufacturers are already pursuing plans to develop supply chains that meet these procurement requirements, proposals for mines and processing facilities often face challenges. Indigenous and environmental problems have decreased proposed lithium mine in Nevada. In some cases, important materials, such as cobalt and graphite, are not readily sourced domestically or from fair trade allies.
Proposed recycling projects could help meet demand. redwood materials projects that its recycling facility, currently under construction in Nevada, will provide cathode and anode materials to support one million electric vehicles per year by 2025. Despite such optimistic projections, experts anticipate that recycling can only play a small role in offsetting the demand for raw materials needed to scale up electric vehicle adoption over the next decade.
How much can the bill do to reduce emissions?
Clean energy supporters called the bill historic. In addition to a massive investment in renewable energy and electric vehicles, it will support technologies such as carbon capture and storage and zero-carbon fuels, and will include a compensation to limit methane emissionsas well as some trade-offs that encourage fossil fuels.
Forecasters have predicted that the climate package as a whole could put the US on track to reduce greenhouse gas emissions by: about 40% by 2030 compared to 2005 levels – still less than the Biden administration target of 50% reductionbut closer.
But if the US is to achieve those goals, electric vehicles must replace millions of fossil fuel vehicles. A realistic EV tax credit that gives manufacturers time to diversify their supply chains and make these vehicles more affordable for all Americans will be critical. The proposed policy risks shorting EV tax credits when they are most needed.
James Morton Turner is a professor of environmental studies at Wellesley College.