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Why the New Federal Tax Credit Rules May Just Kill the EV Incentive For Good

After Senator Joe Manchin announced a deal with the Republican majority to approve the Inflation Reduction Act, several automakers decided to complain. Most of them still benefit from the current federal tax credit, which is something you should not forget. When you check the conditions for the new EV incentives in the new bill, it is clear why these carmakers are protesting: the measures are not for current EVs. They are for future ones. If they are never made, the Inflation Reduction Act will just kill the incentives for good.
Discussions Around the H.R. 3684, the Invest in America ActMeeting at the WTO (World Trade OrganizationUAW Protest for a Cleaner EnvironmentFord Used to Refer to the Federal Tax Credit as an Advantage Over TeslaThe Mexican Economy Minister Tatiana Clouthier Said Mexico Would Impose Tariffs on the U.S. Should Union-Based Tax Incentive Be ApprovedKia Niro EVMini Cooper SEChevrolet Bolt EUVHyundai Kona ElectricEVs ChargingVolkswagen ID.4Joe Manchin said the Build Back Better Act will not have union-based EV tax incentive: it's goneScuderia Cameron Glickenhaus shows final style for the Hydrogen Fuel Cell Boot Zero-EmissionScuderia Cameron Glickenhaus shows final style for the Hydrogen Fuel Cell Boot Zero-EmissionScuderia Cameron Glickenhaus shows final style for the Hydrogen Fuel Cell Boot Zero-EmissionScuderia Cameron Glickenhaus shows final style for the Hydrogen Fuel Cell Boot Zero-EmissionScuderia Cameron Glickenhaus shows final style for the Hydrogen Fuel Cell Boot Zero-EmissionScuderia Cameron Glickenhaus shows final style for the Hydrogen Fuel Cell Boot Zero-EmissionThe Inflation Reduction Act does not want to help people buy current EVs: it wants automakers to sell different electric cars
We have already told you what the eligibility requirements are, but it is worth reminding you of them. Only EVs that cost up to $55,000 and the SUVs, pickup trucks, or vans with a price equal to or inferior to $80,000 can pocket the $7,500 from the federal government. However, that depends on where the raw materials and the battery components were made.

For these EVs to be eligible for the $7,500 until the end of 2023, they will need 40% of their raw materials processed, extracted, or recycled in North America or countries with which the U.S. has a free trade agreement deal. That gives them half of the incentives, or $3,750. The other half comes to those that have 50% of battery components manufactured or assembled in North America, also until 2023 ends.

Those percentages increase in 2024 respectively to 50% and 60%. They keep changing to 60% and 70% in 2025, 70% and 80% in 2026, and 80% and 90% in 2027. The battery component percentage only stops growing in 2028, to 100%, while raw materials just have to be at least 80% from 2027 onward.

Very few cars, if any, meet all these demands right now. In other words, the Inflation Reduction Act was not designed to help people buy EVs. Its goal is to incentivize automakers to produce the electric cars politicians think they should sell.

Money has no borders. For automakers, it does not matter where they make a profit. This is why so many have set foot in China, which has become the largest automotive market in the world. This is also why they taught the Chinese industry how to make cars with their mandatory joint ventures. The issue is that this led Chinese megalopolises to get so crowded with vehicles that their emissions in such concentrated areas became a public health crisis.

China decided to nourish electric mobility before most other countries to lower respiratory issues in its main cities. In Shanghai, an electric car can grant you a license plate. Regular vehicles have to participate in a license plate auction system that makes them cost north of $15,000. Without them, you cannot buy any ride.

This gave China an edge in electric cars that will be hard to beat. The country produces the most lithium-ion cells and motor parts, processes most of the raw material to make them, and makes a big chunk of battery components.

The international health crisis and Ukraine’s invasion by Russia showed the world that being dependent on dictatorships for anything is a bad deal. Counting on gas and oil from Russia or battery components and raw materials from China may turn into a mistake people will regret for years – ask Germany about Russian gas for its industry.

If that was not enough, the U.S. also wants to recover its leadership in the carmaking business. If the future of personal transportation lies with electric motors, that’s what Americans must master.

The Inflation Reduction Act makes that a necessity for automakers. Anyone who manages to sell an electric car below $55,000 or $80,000, respecting the raw material and battery component demands, can automatically sell something for $7,500 less than its competition without having to cut costs in the same proportion.

If the bill becomes a law without any changes, that may either cause a rush to develop vehicles that meet its demands or lead automakers to just give up on the incentives because the investment to obtain them does not pay off. At this point, we have no idea which of these alternatives will prevail, but General Motors gave us a fair idea of what to expect.

GM released a statement on the Inflation Reduction Act in which it said it is trying to “localize as much of the supply chain as possible with the recognition that secure, sustainable, scalable and cost-competitive supply chains are key to enabling an all-electric, clean transportation future.” It also said that “some of the provisions are challenging and cannot be achieved overnight,” but that it is that all efforts “can establish the U.S. as a global leader in electrification today, and into the future.”

That suggests the carmaker is ready to take the rules as they are and to try to turn them into a competitive advantage. Rivian and Lucid complained about the bill for obvious reasons: they have nothing that meets the rules at the moment and may take long to offer anything that does. Legacy carmakers seem to be better prepared to use the new rules in their favor.

That may work as planned by the government or not. If automakers are not able to offer engaging products that are eligible for the new federal tax credit, people will not buy them. With that, car companies will not have the right incentives to “localize as much of the supply chain as possible.” In other words, the Inflation Reduction Act may backfire on its most crucial goals.

For the idea to work, legislators will have to help the automotive industry so that these companies can put the U.S in the position these politicians want it to have. Right now, the only certainty we have is that challenging China as an EV center of excellence will take years. Each car project demands around three when everything is already sorted out, such as the suppliers. Companies manufacturing EVs in the U.S. will have to establish the supply chain that the Inflation Reduction Act wants. Did we say it will take years to happen? There you have it.

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