U.S. Sets Stringent Limits On Chinese Content For EV Tax Credit

The number of electric vehicles eligible for consumer tax credits in the US is poised to shrink after the Biden administration set rigorous limits on the amount of materials manufacturers can source from China and other foreign adversaries.

An electric vehicle (EV) charger is plugged into a vehicle at an Energy Absolute Pcl Anywhere charging station in Bangkok, Thailand, on Wednesday, June 5, 2019. Energy Absolute, Thailand’s second-largest electricity generating company by market capitalization, is using subsidies and tax breaks to put 5,000 EVs on the road by next year, backed by 700-plus charging stations. It’s also planning a $3 billion factory to make lithium-ion batteries. Photographer: Brent Lewin/Bloomberg

The number of electric vehicles eligible for consumer tax credits in the US is poised to shrink after the Biden administration set rigorous limits on the amount of materials manufacturers can source from China and other foreign adversaries.

The guidelines, which were required as part of a deal to extend the $7,500 tax credit through Biden’s signature climate law, set a 25% ownership threshold for a company or group to be classified as a foreign entity of concern. The restrictions will apply to battery components next year, then extend to suppliers of key battery raw materials, such as nickel and lithium, in 2025.

The definition has wide-reaching implications because starting in 2024, vehicles containing any battery components manufactured or assembled by FEOCs will no longer qualify for the tax credit. In writing the long-awaited rules, the Biden administration has tried to balance two competing agendas — weaning US industry off of low-cost Chinese materials that dominate today’s supply chains, while still incentivizing EV adoption to combat climate change.

Delays in spelling out the requirements have left the mining, auto and battery industries in limbo, with just weeks until the new rules kick in. Outlining them now will give automakers and their suppliers some certainty in project planning.

Read More: Chinese Firms Are Seeking Korean Partners to Skirt US EV Rules

Passed into law last year, the Inflation Reduction Act has attracted more than $100 billion of investment in the North American battery and EV supply chains as part of efforts to reduce reliance on China. However, the Asian nation’s dominance of the global industry for now means that only a limited number of models would be currently eligible for the IRA tax credit. 

There will be a public comment period before the rules are finalized to take effect Jan. 1.

Similar to Chips

The 25% ownership limit is in line with language in the CHIPS and Science Act, which aims to reshore assembly of high-tech equipment like semiconductors. The law bars companies that receive Chips Act funds from engaging in joint projects with entities that have 25% or more Chinese ownership, among other restrictions.   

The list of qualifying car models is poised to possibly shrink further as the FEOC rules come into force over the next two years. Models that were grandfathered in under the first phase of rulemaking may become ineligible once the component and raw material rules are implemented. That’s because a large percentage of the raw materials needed to produce batteries are mined elsewhere — in many cases by Chinese-controlled companies that would be subject to the new restrictions.

The world’s biggest nickel producer, Tsingshan Holding Group Co., and top cobalt miner, CMOC Group Ltd., are both Chinese-owned companies with international mining operations. 

China accounts for 85% to 90% of global rare earth element mining and processing, and it refines 60% of the lithium, 65% of the nickel and 68% of the cobalt needed for EV batteries, according to a September research note by Goldman Sachs Group Inc. The bank also estimates that 65% of battery components, 71% of battery cells and 57% of the world’s EVs are made in China.

Loopholes Abound

The rulemaking process sparked a year-long lobbying frenzy. Carmakers pushed hard for looser rules, arguing that severe restrictions would ratchet up the cost of EVs and that China’s dominance of the supply chain makes it practically impossible to exclude. By contrast, US mining and recycling companies sought a tougher line in order to defend and fast-track domestic production of critical battery-making materials. 

Even with strict limits on Chinese ownership and influence, there are still large loopholes in the Inflation Reduction Act that undermine that goal, something Senator Joe Manchin, a clutch vote in passing the law, has criticized repeatedly. The West Virginia Democrat has also railed against the “ludicrous” electric vehicle tax credit for subsidizing batteries made by nations hostile to the US. Chinese firms have been lining up to invest in South Korea’s battery industry as a gateway to the US market.

Read More: Joe Manchin Meant to Make Electric Car Tax Credits Hard to Get

EVs and hybrids that are leased instead of purchased aren’t subject to the content requirements. Treasury also made accommodations to give automakers more time to comply with some aspects of the rules, such as developing systems to physically track critical minerals and other low-value materials with more precision.

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