Photo: Tesla | Edited
The U.S. Treasury is poised to release guidance next week on rules of origin for EV batteries, which means the IRA rules will enter effect in April. Among those affected is Tesla, whose Model 3 RWD entry model is built with LFP batteries sourced from China.
Tesla has been among the beneficiaries of the Inflation Reduction Act. As the leading EV maker, it exhausted the 200,000 EV quota of the previous incentive program long ago. When the IRA entered into effect on January 1, Tesla sales boomed thanks to the $7,500 tax credit. It wasn’t a painless process, as the IRS initially made a mess of classifying various EVs into car and SUV categories, which means that some Tesla models did not qualify for the $7,500 tax credit.
After the IRS cleared the confusion, all Model 3 and Model Y versions qualified for the tax credit. Still, not all trims meet the rule of origin for EV batteries outlined in the IRA. With a little help from the Treasury Department, which failed to draft the battery sourcing rules, Tesla got away with the full $7,500 credit even for cars built with made-in-China LFP batteries. This is set to change in April, as the U.S. Treasury will announce the rules as early as next week, according to a Reuters report.
Based on the rules of origin, the full $7,500 tax credit is only available to customers buying North American-assembled EVs that meet certain local battery production and mineral extraction processing standards. More specifically, at least 50% of critical minerals in the batteries must be extracted or processed in the United States or a country with a U.S. free-trade agreement, or recycled in North America. Only half of the tax credit is awarded for cars with batteries that have at least 40% of battery materials originating from North America.
This makes Tesla Model 3 RWD ineligible under the new rules because its LFP batteries are imported from China. Customers taking delivery of the entry-level Tesla model after April 1 will not benefit from the IRA tax credit, so they must hurry. All other Tesla models will continue to benefit because their batteries are built in the U.S. Tesla will probably have to take these changes into account and adjust its pricing policy accordingly. The EV maker has already notified its employees, according to an internal memo seen by Electrek.
The Model 3 RWD or Standard Range is Tesla’s cheapest vehicle now, with a price of $42,990. It drops to $35,490 when factoring in the IRA tax credit. The Model 3 RWD will be a tough sell from April, as the Model Y with the tax credit will only be $4,500 more expensive. Tesla will probably consider lowering the price of its entry-level model to make it more accessible or making the Model Y more expensive. Tesla has tried both moves in the past, so everything is on the table.
After the IRS cleared the confusion, all Model 3 and Model Y versions qualified for the tax credit. Still, not all trims meet the rule of origin for EV batteries outlined in the IRA. With a little help from the Treasury Department, which failed to draft the battery sourcing rules, Tesla got away with the full $7,500 credit even for cars built with made-in-China LFP batteries. This is set to change in April, as the U.S. Treasury will announce the rules as early as next week, according to a Reuters report.
Based on the rules of origin, the full $7,500 tax credit is only available to customers buying North American-assembled EVs that meet certain local battery production and mineral extraction processing standards. More specifically, at least 50% of critical minerals in the batteries must be extracted or processed in the United States or a country with a U.S. free-trade agreement, or recycled in North America. Only half of the tax credit is awarded for cars with batteries that have at least 40% of battery materials originating from North America.
This makes Tesla Model 3 RWD ineligible under the new rules because its LFP batteries are imported from China. Customers taking delivery of the entry-level Tesla model after April 1 will not benefit from the IRA tax credit, so they must hurry. All other Tesla models will continue to benefit because their batteries are built in the U.S. Tesla will probably have to take these changes into account and adjust its pricing policy accordingly. The EV maker has already notified its employees, according to an internal memo seen by Electrek.
The Model 3 RWD or Standard Range is Tesla’s cheapest vehicle now, with a price of $42,990. It drops to $35,490 when factoring in the IRA tax credit. The Model 3 RWD will be a tough sell from April, as the Model Y with the tax credit will only be $4,500 more expensive. Tesla will probably consider lowering the price of its entry-level model to make it more accessible or making the Model Y more expensive. Tesla has tried both moves in the past, so everything is on the table.
— Sawyer Merritt (@SawyerMerritt) March 23, 2023
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