US Treasury Department introduces EV credit guidelines

The US Treasury Department released proposed guidance on critical mineral sourcing for electric vehicles March 31, clarifying requirements for new EV tax credits.

Automakers have been awaiting the proposal, which provides necessary details for determining whether EVs will become eligible for a $7,500 tax credit under the Inflation Reduction Act. As stated in the law, companies must certify their cars are assembled in the US. They must also meet thresholds for the percentages of battery components and critical minerals that are sourced or processed in the US or by a free trade partner.

The new guidance does not change those percentages, but it provides definitions of key steps in battery minerals' production processes and outlines steps to identify where eligible EVs can source such materials.

Treasury's proposed guidance expands eligible countries beyond those with formal free trade agreements, as laid out in the Inflation Reduction Act. EU members and other nations had previously raised concerns with US President Joe Biden about the law's reference to countries with free trade agreements, which do not include EU nations, according to a list from the Office of the United States Trade Representative (USTR).

Sen. Joe Manchin (D-W.Va.), chair of the Senate Energy and Natural Resources Committee, blasted the guidance. Two days earlier, Manchin said he was willing to sue the administration over a possible definition of processing or manufacturing that would overly expand, in his view, the volume of EV production activities that could take place abroad.

The guidance, when finalized, will apply to vehicles placed in service after April 17, 2023, affecting millions of EVs. Sales of plug-in EVs are expected to reach 1.3 million in the US in 2023, growing 118% to 2.8 million by 2027, according to S&P Global Market Intelligence data. Battery demand will closely follow that trend, with battery use in plug-in EVs expanding 132% between 2023 and 2027 to reach 228 GWh.

"The critical minerals and battery components requirements will reduce the number of electric vehicles currently eligible for the full credit in the short term, in order to create incentives to bring supply chains and manufacturing in the United States," a senior Treasury official told reporters. "However, we believe these requirements will significantly increase the number of vehicles made and sold in the US over the next decade as new investments and American production come online."

Under the Inflation Reduction Act, a certain percentage of the critical minerals used in an EV battery — 40% in 2023 and increasing 10 percentage points each year through 2027 — must be extracted or processed in the US or in a country with whom the US has a free trade agreement.

The Treasury's guidelines define extraction as "activities performed to extract or harvest minerals or natural resources from the ground or a body of water," including physical refining but not chemical or thermal refining. Processing is "the non-physical processes involved in refining of non-recycled substances or materials."

Free trade deals at issue

The proposal provides some clarity on which countries qualify as having a free trade agreement with the US. Although the USTR identifies just 20 countries with whom the US has formal free trade agreements, the proposed guidance says no official definition for the types of agreements that qualify under the Inflation Reduction Act was written in the original law.

The proposal expands the group of countries eligible to supply materials that qualify for the tax credit beyond the USTR list. This expansion comes in the form of an outline of the criteria that determine if other agreements qualify as a free trade agreement without meeting the USTR's formal definition of the term. According to the proposal, all the USTR free trade agreement countries would be included under the Inflation Reduction Act, as would additional nations like Japan, since it recently signed a critical minerals agreement with the US.

Members of Congress had already questioned Treasury's expansive view of which countries could qualify for the tax credit in the weeks before the proposal was released. Manchin slammed the proposal after it was released.

"The guidance released by the Department of the Treasury completely ignores the intent of the Inflation Reduction Act," Manchin said in a March 31 statement. "It is horrific that the administration continues to ignore the purpose of the law, which is to bring manufacturing back to America and ensure we have reliable and secure supply chains. American tax dollars should not be used to support manufacturing jobs overseas."

Although administration officials have framed the guidelines as a boon for the domestic EV industry, a representative for some of the nation's largest automakers expressed disappointment with the proposal.

"This latest turn will further reduce the number of eligible EVs. Fewer vehicles (and fewer customers) will qualify for the full $7,500 credit in the near term," John Bozzella, president and CEO of Alliance for Automotive Innovation, wrote in a March 31 post on the trade group's website. "We now know the EV tax credit playing field for the next year or so. March 2023 was as good as it gets."

Gaps in the proposed rule

The proposal does not define criteria for a "foreign entity of concern." Under the Inflation Reduction Act, EVs eligible for the Clean Vehicle Credit are forbidden from containing battery components manufactured in such a country beginning in 2024. Starting in 2025, any eligible vehicle will also not be able to source critical minerals that are extracted, processed or recycled by such an entity. It is likely the formal definition of a foreign entity of concern will include countries such as China in light of growing consciousness of US foreign dependence, but automakers are left to wait for clarity.

The proposed guidance also says the Treasury Department and the IRS will eventually propose more stringent guidelines for how to determine sourcing for critical minerals used in qualifying vehicles.

The guidance is the first step in providing a framework for EV-makers to follow to make their products eligible for tax credits, but the effectiveness of the rule will ultimately depend on its implementation, said Robbie Diamond, founder and CEO of SAFE, an energy security organization.

"The guidance provides the clarity industry needs to invest in more secure and reliable supply chains for critical minerals and battery components with our allies," Diamond said in a statement. "But essential work remains to define the foreign entity of concern provision of this law and to determine the extent this will promote the development of minerals processing and cathode and anode manufacturing in North America.

"Ultimately, it's imperative that we expand the circle of allies and partners who can benefit from and contribute to our supply chains — this includes the agreement just reached earlier this week with Japan."

The proposal will be open to public comment until June 16.

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