How can this possibly go wrong?
In an odd twist of events, the government is letting automakers decide whether their vehicles meet the requirements set out by the Treasury. As part of the Inflation Reduction Act, certain EVs now qualify for a $7,500 tax credit if they meet a specific set of standards.
The Treasury was responsible for setting these standards but missed the original 1 January 2023 deadline. Naturally, the collective industry assumed the feds were working on stringent guidelines to cut the USA's reliance on China for electric vehicle batteries.
As it turns out, the guidelines are not that harsh, and according to Bloomberg, automakers will be allowed to do their own math to see whether their EVs are eligible. The government only mentions a list of "foreign entities of concern" and that this list will be released later.
We used the new regulations and calculated that 11 vehicles qualify for the full credit, while nine are eligible for the partial credit. The credit is split in two, with the total $7,500 made up of $3,750 for the battery and another $3,750 for the contents of the battery.
For now, 50% of the materials used to make the battery must be sourced from the USA or a country with which the USA has a free-trade agreement. To get the other $3,750, 40% of the battery's critical minerals have to be extracted or processed in the US or a country with which the US has a free-trade agreement.
As you can imagine, this is hard to police, so the government relies on the automakers to crunch the numbers. While this may seem stupid, there is some method to the madness. The government knows it can't go cold turkey on China. It may only mine 13% of the world's lithium, but it produces 70% of battery cells, giving it a monopoly.
This trend won't last forever. The percentages for battery components and mineral sourcing will increase every year until both values have to be 100% by 2029.
While this seems like the government is taking a slightly less strict stance on China, it's giving various manufacturers a much-needed gap to get their American investments up and running, of which there are many in the works.
We can use the Hyundai Ioniq 5, Volkswagen ID.4, and Tesla Model 3 Performance as an example (the Tesla Model 3 Standard Range RWD only qualifies for half the tax credit because its battery comes from China). The Hyundai is a better car in almost every department, yet it does not qualify for the full credit like the Tesla and Volkswagen. Once Hyundai's new Georgia battery plant starts churning out products in 2025, the Ioniq 5 will be eligible and more competitive price-wise against the beloved Model 3.
The automakers will only be allowed to crunch their own numbers for a short while. The Treasury acknowledges "transition rules," which means automakers will now do the math and report back to the Treasury in June. From there, these two entities will expand the regulations, hopefully finding a middle ground that benefits the consumer.
By 2025, the Treasury will start being more strict about compliance. Meanwhile, many people use the commercial vehicle leasing loophole, which has no assembly requirements. We're sure the Treasury will close this loophole at some point or regulate it better.
This odd twist of events is the latest in a series of Inflation Reduction Act issues. While its concept is sound (various investments will create thousands of jobs), there is a good chance it will also hurt existing jobs in the gas-powered community.
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