Biden administration releases electric vehicle tax credit rule

The Biden administration issued a final rule May 3 governing implementation of a major electric vehicle tax credit with updates to the credit's critical minerals restrictions.

The incentive is made available through the US Inflation Reduction Act and is worth up to $7,500/vehicle. It requires a car to meet thresholds for the percentages of its battery components and critical minerals that are sourced or processed in the US or by a free trade partner. And it requires that those same materials not come from a "foreign entity of concern" (FEOC) for a vehicle buyer to receive the credit.

The final rule from US Treasury Department and IRS is designed to give the automotive supply chain time to adapt to new sourcing and tracing requirements related to the incentive by adopting two transition rules proposed in earlier guidance. The FEOC rule applies to products from the People's Republic of China, the Russian Federation, the Democratic People's Republic of Korea, and the Islamic Republic of Iran. For the purposes of defining FEOC, the rule says licensing agreements and contractual agreements may apply to control of an FEOC, and subnational governments and some current and former senior foreign politicians fall under the definition of a foreign country's government.

Separate but related guidance from the US Energy Department, also released May 3, cements a 25% limit on the portion of an entity's board seats, voting rights or equity interest that can be held by a FEOC before it is deemed subject to foreign control and ineligible from participating in a qualifying vehicle's supply chain.

"These actions provide certainty and clarity to a marketplace that's already growing rapidly," John Podesta, senior adviser to the president for international climate policy, said during a May 2 press call. "These actions provide a strong signal to automakers that we want to see EVs built here in America with components and critical minerals sourced from the US and our allies and partners, and not from foreign entities of concern controlled by countries" like the [People's Republic of China].

The final rule pins down critical minerals content requirements of EV batteries — calculated on the basis of value — that must be met for the EV tax credit to apply. The tax credit hinges on critical minerals origins, requiring that a percentage of materials in EV batteries come from the US or countries with which the US has a free trade agreement. The requirement is 40% for vehicles that entered service after previously proposed content guidance until Jan. 1, 2024, 50% for EVs that entered service in 2024, 60% for 2025 and 70% for 2026. After Dec. 31, 2026, the percentage climbs to 80%.

Tracing exceptions

The first major feature of the final rule is the institution of a previously proposed temporary exception that would allow automakers to be exempt from the rule's FEOC due diligence tracing requirements for select "non-traceable critical materials." The agencies define such products as "low-value battery materials" that manufacturers cannot reasonably determine the origin of due to industry practices.

Graphite contained in anode materials and applicable critical minerals contained in electrolyte salts, electrode binders or electrolyte additives will be considered nontraceable under the final rule text.

Automakers using those materials as part of their electric vehicles will be able to receive a tracing exception, which will apply through Jan. 1, 2027, so long as they submit a report during an upfront review process demonstrating how they will comply with FEOC tracing requirements once the rule's transition period ends. Eventually the rule expects automakers to innovate ways to track materials such as graphite.

The National Mining Association blasted the final rule for giving automakers too much wiggle room over material sourcing rules.

"Congress created these tax incentives to secure our supply chains and generate American jobs while supporting EV adoption; they did not intend for loopholes to be created that essentially amount to a blank check from the American taxpayer to China," mining association President and CEO Rich Nolan said in a May 3 statement. "We need to be using every tool in our toolbox to aggressively address our critical mineral supply chain vulnerability and build the secure, reliable mineral supply chains our economic and national security demand; loosening requirements set by Congress is not the answer."

Automakers were supportive of initial guidance that proposed the tracing exception, while mining groups criticized the exception and outlined certain materials, including graphite, that should be labeled as traceable.

Determining added value

The final rule offers a new test, dubbed the "traced qualifying value add test," which manufacturers must use to determine the actual value-added percentage for extracting, processing and recycling critical minerals in their supply chain to meet the credit's mineral sourcing requirement.

Under the Inflation Reduction Act, 50% of the value of the applicable critical minerals in an electric vehicle's battery must be extracted or processed in the US or in a country with which the US has a free trade agreement in 2024. That percentage increases by 10 percentage points each year through the end of 2027.

The new rule clarifies that manufacturers may use a "50% value added test" outlined in previous guidance through the end of 2026 as a transition rule.

The rule's release date, in advance of a key deadline under the US Congressional Review Act, could insulate the language from potential Republican overhaul efforts following the November US elections.