US offers clarity with new guidance on IRA credits
The Biden administration issued on Friday its long-awaited guidance on clean vehicle credits, with the proposed rules gradually curbing China’s role within the US battery and EV supply chain.
Starting in 2024, US-made EVs which contain battery components manufactured or assembled by a “foreign entity of concern” (FEOC) will be ineligible for full Inflation Reduction Act-linked subsidies. Furthermore, in 2025, these vehicles must not contain any critical minerals that were extracted, processed or recycled by a FEOC.
However, the government has proposed a temporary transition rule, under which critical minerals and associated constituent materials may be allocated to a particular set of battery cells. The plan is to exempt critical minerals tracing for two years. Battery cells would then have to be physically tracked to batteries and EVs using a serial number or other identification system, similar to the proposed EU battery passport, Kallanish notes.
The US Department of Energy currently defines a FEOC as a foreign entity that is “owned by, controlled, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation.” These covered nations are China, Russia, North Korea and Iran. In its statement outlining the guidance, the Department of Treasury claims these rules will “strengthen the security of America’s supply chains.”
To allow compliant EVs already in US dealerships and currently being manufactured to qualify for the credit, while the rulemaking proceeds, the proposed rules would provide a transition rule to expedite certification for new EVs that do not contain battery components manufactured or assembled by a FEOC. This would be in place from 1 January 2024 until 30 days after the rules are finalised, the Department of Treasury explains.
“The proposed rules would also create an upfront review system starting in 2025 that would provide additional oversight of FEOC compliance, as well as certainty to manufacturers,” it adds. “For new vehicles placed in service in 2025 or later, the IRS would track FEOC compliance via a compliant-battery ledger.”
In addition to requiring assembly in North America, the government will move the goalposts on battery components and critical mineral requirements each year. For instance, in 2024 and 2025, batteries will only be eligible for a $3,750 credit if they are comprised of 60% North American-manufactured or assembled battery components. That increases by 10% each year, reaching 100% in 2029.
To receive the full $7,500 credit, EVs would have to have 60% of their battery components and 50% of their critical minerals coming from North America or a free trade partner next year. Critical minerals could still be processed by China in 2024, but from 2025, that would no longer be allowed.
Commenting on the guidance, trade body Alliance for Automotive Innovation says the guidance recognises the transformation of the US industrial base “won’t happen overnight.” It notes the temporary exemption in trace materials for two years is “significant and well-advised … Otherwise the EV tax credit may have only existed on paper.”
John Bozzella, ceo of the alliance, believes the guidance provides clarity for automakers, although further details on the impact of US-China partnerships are still needed. For now, he understands companies operating in China are considered FEOC, but Chinese entities with specific ownership or governance structures might be permitted in certain circumstances.
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