The climate and energy package, which awaits final approval by Congress, aims to achieve two goals that are not always compatible: making electric vehicles more affordable while cutting China out of the supply chain.
Auto industry representatives have complained that the $7,500 tax credit offered to electric vehicle buyers is so large that few cars qualify. Buyers can’t have very high incomes, the vehicles can’t cost too much, and the cars and their batteries have to meet made-in-America standards that many car manufacturers can’t easily meet.
“It’s going to be very difficult for cars to qualify and for consumers to qualify for federal tax credits for EV purchases,” said John Bozella, president of the Alliance for Automotive Innovation, which represents major U.S. and foreign automakers.
Some companies will benefit more than others from the bill, known as the Inflation Relief Act, which is expected to pass the House on Friday, after the Senate approved it on Sunday.
The new credits will support companies like Tesla and General Motors, which have been selling electric cars for years and have reorganized their supply chains to manufacture the vehicles in the US. A partnership between GM and LG Energy Solutions will soon open a battery plant in Ohio as part of a wave of electric vehicle investment by automakers and suppliers.
Vehicles sold by Tesla and GM will qualify for incentives that automakers have lost by selling more than their quota of 200,000 electric cars under current law. The law removes that cap.
The law could be a thorn in the side for companies like Toyota and Stellar, which own Chrysler, Jeep and Ram, because they haven’t started making or selling many battery-powered vehicles in the US.
The law effectively penalizes new electric car companies like Lucid and Rivian. The incentive is for sedans and pickups, vans or sport utility vehicles valued at no more than $55,000 up to $80,000.
The Lucid’s cheapest sedan starts at just over $80,000. Rivian Electric pickups start at $72,500 but can easily top $80,000 with options. The company said it is investigating whether customers can lock in incentives by entering into a binding purchase agreement before the new law takes effect.
Even automakers that may lose access to the tax credit can benefit from the law in other ways. The bill contains billions of dollars to help automakers build factories and establish domestic supply chains. Dealers will benefit from an offer of 4,000 credits for electric vehicles.
What’s in the climate, health and tax bill
“We need to look at this law as a whole,” said Margo Oge, former director of the Environmental Protection Agency’s Office of Transportation and Air Quality. “Is it perfect? No, it will create jobs and it will be good for the climate.”
And once automakers make the changes to their supply chains required by the bill, they could offer customers many incentives and then some for the rest of the decade. It may take a few years, but eventually the law will help make electric cars cheaper than gasoline and diesel cars, analysts say.
“The consumer tax credit is definitely not written the way I’m writing it,” Sen. Debbie Stabenow, a Michigan Democrat, told reporters, referring to the $7,500 incentive. But she acceded to the wishes of Senator Joe Manchin III, a West Virginia Democrat, hoping to get the bill passed. Mr. Manchin said it makes little sense to subsidize electric vehicles because demand is so strong there are long waiting lists for many models.
Still, Ms. Stabenow added, “There are a lot of wonderful things here for us.
The aspect of the bill that has generated the most complaints is that by 2024, at least 50 percent of the components in an electric car’s battery must come from the United States, Canada or Mexico. In the year By 2028, the percentage will grow to 100 percent. And the share of minerals in batteries coming from the US or trading partners will grow to 80 percent by 2026.
Some industry executives said it would take up to five years for auto companies to revamp their supply chains to make their products eligible for the tax credit.
Others say this is overkill. “I would be shocked if that happened,” said Joe Britton, executive director of the Zero Emissions Transport Association, whose members include Tesla and suppliers of batteries and raw materials.
“We still see this as a big electrification of transport, especially compared to where we were a month ago,” said Mr Britton, despite the company opting for fewer restrictions.
Some of the limitations on eligibility for tax credits are not as strict as they appear and may be subject to interpretation. For example, Ms. Stabenow said, the $7,500 credit appears to be in effect for all manufacturers until next year, before content restrictions are introduced.
The law leaves it up to regulators to decide which classes are classified as Chinese. For example, it is unclear whether Chinese companies such as CATL would be forced out of the market if they produced batteries in the United States. CATL has been studying building a plant in the south to supply Ford Motor and BMW.
Despite Mr. Manchin’s commitment to concessions to the fossil fuel industry, and despite the law’s effect on public transportation or two-wheeled vehicles such as scooters and electric bicycles, many environmentalists generally applauded the law for reducing inflation.
The environmental nonprofit Sierra Club has been working to reward buyers of used electric vehicles and was happy to see them in the bill, said Kathryn J. Garcia, director of the organization’s Clean Transportation for All campaign.
She said it also makes sense not to provide incentives to people with high incomes who don’t need the aid. To qualify for the new electric vehicle credit, buyers cannot have a taxable income of more than $150,000 if they are a single filer or $300,000 for joint filers. “It stretches the dollar to those who need it most,” Ms. Garcia said.
Tesla, the maker of luxury cars popular with wealthy professionals, lost access to the current federal electric-car tax credit several years ago, but has been able to outsell all of its rivals in the electric car business. That means luxury car buyers will continue to buy electric cars regardless of whether they get the tax break or not.
Ultimately, the revenue cap will encourage automakers to offer less expensive vehicles, said Mark Wakefield, co-leader of the automotive and industry practice at consulting firm Alix Partners. “You’ll see a laser focus on getting below the $80,000 and $55,000 caps.”
The price caps and made-in-US rules encourage automakers to develop cheaper batteries that require fewer imported raw materials. Tesla and other automakers are selling cars that use iron- and phosphate-based batteries, known as LFPs, instead of batteries that contain nickel and cobalt, which are expensive and come from countries with poor human rights and environmental records. Iron-phosphate batteries are heavier but often more expensive and last longer. The inflation-reducing legislation “will increase LFP growth,” Mr. Wakefield said.
The law contains other provisions that have received little attention but would accelerate sales of electric vehicles and reduce greenhouse gas emissions.
For example, there is funding to help businesses install electric vehicle chargers. It’s important for people who don’t have a garage or driveway to install their own charger.
A tax credit of up to $40,000 is available for electric or hydrogen cars and buses. Because commercial vehicles spend more time on the road than passengers, they account for a disproportionate percentage of greenhouse gases and harmful pollutants from the transportation sector.
“This makes battery electric propulsion for commercial vehicles imperative,” said Gareth Joyce, CEO of Proterra, a California-based company that makes electric buses and technology for trucks and other commercial vehicles.
Things the bill would push automakers to do, such as using American-made batteries, “can’t happen overnight,” GM CEO Mary T. Barra said during a meeting with President Biden this month. But the bill “will be part of the catalyst that will help us move forward,” she added.
Ford shared a similar view with GM: “While the electric vehicle consumer tax credit targets cannot be achieved overnight, the bill is an important step towards meeting our shared national climate goals and strengthening American manufacturing operations,” the company said. A statement urging the House to approve the bill.