The Inflation Reduction Act, passed by Democrats last year, is facing controversy over how it is being interpreted by President Biden’s Department of the Treasury.
According to the proposal put forth by the Treasury Department, U.S. automakers will be allowed to use more foreign-sourced minerals and battery parts while still qualifying for the electric vehicle tax credit.
However, this goes against the original intention of the act, which was to build the electric vehicle industry in the United States and reduce reliance on China, which currently dominates the EV battery supply chain.
Senator Joe Manchin, chairman of the Senate Energy and Natural Resources Committee, has voiced his concerns over the interpretation of the Inflation Reduction Act, calling the Treasury Department’s proposal a “horrific giveaway to foreign suppliers.”
The proposal takes effect on April 18, giving automakers and consumers two more weeks before the new restrictions from the Inflation Reduction Act take place.
After that date, fewer electric vehicles will qualify for the full tax credit than the number of models eligible under the old law, but more than was the intent of the Inflation Reduction Act.
The act specifies that to qualify for $3,750 of the credit, an increasing share of a vehicle’s battery minerals, such as lithium and nickel, must be extracted or processed in the United States or in a country with which the United States has a free-trade agreement.
The other half of the credit is supposed to be available only for vehicles in which a majority of its battery components are made in North America, starting at 50 percent this year and up to 100 percent by 2029.
However, few electric vehicles currently on the market are expected to qualify for even half of the credit.
The Treasury Department’s proposed rules for the tax credit would allow electric vehicles leased to consumers to qualify for a separate commercial vehicle tax credit, which does not entail sourcing, income, or price restrictions.
This loophole would allow high-income individuals to benefit from tax subsidies through a backdoor approach.
Treasury is also redefining “free trade agreements” to include one-off deals with countries that commit not to impose trade barriers on critical minerals, a departure from congressionally approved trade agreements.
This change will allow more vehicles to qualify for both parts of the credit, removing Manchin’s sourcing conditions.
The revised rules mean that the real cost of the climate and energy subsidies in the Inflation Reduction Act will be far more than the $391 billion that Democrats claimed when they passed the bill.
Goldman Sachs estimated recently that the cost of the Inflation Reduction Act could be more than triple the original estimate–$1.2 trillion over 10 years because of the EV tax credits and other provisions of the bill.
The Treasury Department is allowing comments on the proposed EV tax credit rule for 60 days.
The full list of qualifying cars will be published in a couple of weeks and afterwards, it will be updated monthly.
Tesla indicated that the least expensive version of its Model 3 sedan, one of the most popular electric cars, would no longer be eligible for the full credit because the car uses a battery made in China.
General Motors, on the other hand, indicated that three electric vehicles it plans to sell this year — the Cadillac Lyriq and electric versions of the Chevrolet Equinox and Blazer sport utility vehicles — would qualify for the full credit.
The Treasury Department’s guidance was originally due in December, but the department postponed the proposal’s release until the end of March.
In the meantime, it allowed the credit to go into effect without any restrictions on where a vehicle was produced. Since January, electric vehicle buyers have been able to receive the credit as long as they did not exceed an income threshold and the car was below a certain price.
“We appreciate the Treasury moving swiftly on releasing this guidance. Providing federal incentives for cleaner vehicles is crucial,” said Katherine García, director of Sierra Club’s Clean Transportation for All campaign. “We are in the midst of a climate crisis, and our gas-powered vehicles are responsible for the majority of this pollution, in addition to contributing to health-threatening air quality across the nation.”
“Our nation’s transition to electric vehicles must be delivered with strong standards that protect human rights, respect Indigenous communities, and promote manufacturing in the U.S. This guidance is important to help get us there and promote the long-term growth of the American EV industry,” said García. “As critical mineral demand rises to power technologies like electric vehicles, we must make sure that the way we extract these resources is sustainable, ethical, pro-worker, and abides by environmental and human rights laws.”
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