The climate and energy package approved by Congress on Friday aims to achieve two goals that are not always compatible: Making electric cars more affordable while simultaneously freezing China out of the supply chain.
Auto industry representatives have been griping that the proposed $7,500 tax credit for buyers of electric cars comes with so many requirements that few cars will qualify. Buyers can’t have very high incomes, the vehicles can’t cost too much, and the cars and their batteries must meet American-made standards that many automakers can’t easily achieve.
“It’s going to be much more difficult for cars to qualify and for consumers to qualify for a federal tax credit for the purchase of an electric car,” said John Bozzella, president of the Alliance for Automotive Innovation, which represents major U.S. and foreign automakers.
Some companies will benefit more than others from the sweeping legislation, known as the Inflation Reduction Act, which House Democrats approved on Friday, clearing the way for President Biden to sign it into law.
The new credits favor companies, such as Tesla and General Motors, that have been selling electric cars for years and have reorganized their supply chains to produce vehicles in the United States. A joint venture between GM and LG Energy Solutions will soon open a battery plant in Ohio, part of a wave of electric vehicle investment by automakers and suppliers.
Vehicles sold by Tesla and GM will regain eligibility for incentives that the automakers had lost because they had sold more than the quota of 200,000 electric cars under current law. The legislation removes this limit.
The legislation may be more difficult for companies like Toyota and Stellantis, which own Chrysler, Jeep and Ram, because they have not begun to make or sell large numbers of battery-powered vehicles in the United States.
The legislation effectively penalizes newer electric car companies, such as Lucid and Rivian, whose vehicles may be too expensive to qualify for the credits. The incentives apply to sedans costing no more than $55,000 and pickup trucks, vans or sport utility vehicles costing up to $80,000.
Lucid’s cheapest sedan starts at more than $80,000. Rivian’s electric pickups start at $72,500, but can easily top $80,000 with options. The company said it was investigating whether customers could lock in the incentives by creating a binding purchase agreement before the new law took effect.
Even automakers that may lose access to tax credits can take advantage of the law in other ways. The bill includes billions of dollars to help automakers build factories and establish local supply chains. Dealers will profit from a provision that provides $4,000 in credits toward used electric vehicles, with few strings attached.
What is in the Climate, Health and Tax Act
“We need to look at this law in its entirety,” said Margo Oge, former director of the Office of Transportation and Air Quality at the Environmental Protection Agency. “Is it perfect? No. It will create jobs and it will be good for the climate.
And once automakers make the supply chain changes required by the bill, they will be able to offer customers generous incentives for the rest of the decade and then some. It may take a few years, but eventually the legislation will help make electric cars cheaper than petrol and diesel cars, say analysts.
“The consumer tax credit was certainly not written in a way that I would have written it,” Sen. Debbie Stabenow, a Michigan Democrat, told reporters this week, referring to the $7,500 incentive. But to get the bill passed, she said, she agreed to the wishes of Sen. Joe Manchin III, the West Virginia Democrat. Mr. Manchin has said that subsidizing electric vehicles makes little sense because demand is so strong that there are long waiting lists for many models.
Still, Stabenow added, “There are a lot of wonderful things here for us.”
A feature of the bill that has generated the most complaints will require that by 2024 at least 50 percent of the components in an electric car battery come from the United States, Canada or Mexico. The percentage rises to 100 percent in 2028. And the share of minerals in batteries that must come from the United States or a trading ally will climb to 80 percent in 2026.
Some industry leaders said it would take car companies five years to revamp their supply chains enough for their products to qualify for tax credits.
Others say it is exaggerated. “I would be shocked if that were the case,” said Joe Britton, executive director of the Zero Emission Transportation Association, whose members include Tesla and suppliers of batteries and raw materials.
While the organization would have preferred fewer restrictions, Britton said, “we still see this as a huge accelerator for the electrification of transportation, especially compared to where we were a month ago.”
Some of the restrictions on eligibility for tax credits may not be as strict as they appear and may be interpreted. For example, Stabenow said, it appeared that the $7,500 credit would be valid for all producers through the next year before content restrictions began.
The legislation leaves it to regulators to decide which components should be classified as Chinese. It is unclear, for example, whether Chinese companies such as CATL, the world’s largest battery producer, would be frozen out of the market if they produced batteries in the United States. CATL has reportedly looked into building a factory in the South to supply Ford Motor and BMW.
Most environmentalists have generally applauded the inflation-reduction law, despite concessions made to the fossil fuel industry at Mr. Manchin’s insistence, and even though the bill does little for public transportation or two-wheeled vehicles such as scooters and electric bicycles.
The Sierra Club, the environmental nonprofit, has long pushed to reward buyers of used electric vehicles and was pleased to see it in the bill, said Katherine J García, director of the organization’s Clean Transportation for All campaign.
She said it also made sense not to give incentives to high earners who didn’t need the help. To qualify for the new EV credit, buyers cannot have taxable income above $150,000 if they are single filers or $300,000 for joint filers. “It stretches the dollar for those who need the rebate the most,” García said.
Tesla, which makes expensive cars popular with wealthy professionals, has managed to outsell all of its rivals in the electric car industry despite losing access to the current federal tax credit for electric cars several years ago. It suggests that luxury car buyers will continue to buy electric cars whether they get tax credits or not.
Eventually, the revenue caps will encourage automakers to offer more affordable vehicles, said Mark Wakefield, co-head of the automotive and industry practice at AlixPartners, a consulting firm. “You’re going to see a laser focus on getting below the $80,000 and $55,000 caps.”
The price caps and rules made in America will also encourage car manufacturers to develop cheaper batteries that require fewer imported raw materials. Tesla and other automakers already sell cars with batteries based on iron and phosphate, known as LFP, instead of batteries containing nickel and cobalt, which are expensive and come from countries with tarnished human rights and environmental records. The iron phosphate batteries are heavier, but usually less expensive and last longer. The Inflation Reduction Act “is going to increase the growth of LFP,” Wakefield said.
The legislation contains other provisions that have received less attention, but which can speed up the sale of electric vehicles and reduce greenhouse gas emissions.
There is money to help companies install, for example, electric car chargers. That’s important for people who don’t have garages or driveways where they can install their own chargers.
There are also tax credits of up to $40,000 for electric or hydrogen trucks and buses. Commercial vehicles account for a disproportionately large percentage of greenhouse gases and harmful pollutants from the transport sector because they spend much more time on the road than passenger cars.
“This makes battery electric propulsion for commercial vehicles compelling,” said Gareth Joyce, CEO of Proterra, a California company that makes electric buses and technology for trucks and other commercial vehicles.
The things the bill is pushing automakers to do, such as using American-made batteries, “can’t be accomplished overnight,” said Mary T. Barra, GM’s chief executive, during an appearance with Mr. Biden this month. But the legislation “will be part of the catalyst that helps us move forward,” she added.
Ford expressed almost the same view as GM “While the consumer tax credit goals for electric vehicles are not all achievable overnight, the bill is an important step forward in meeting our shared national climate goals and helping to strengthen American manufacturing jobs,” the company said in a statement which urged the House to pass the law.