For those of us in the Energy, Mobility and EV sector, new Guidelines for U.S. EV Rebates are impacted by American-Made, Limits on Sourcing and Eliminating a Dependence on China. My article shares the facts and my opinions.
American-Made, Limits on Sourcing, Eliminating a Dependence on China– New Guidelines for U.S. EV Rebates
By Don Southerton April 2023
The Biden Administration’s Inflation Reduction Act (IRA) is designed first to encourage manufacturers to shift operations to North America. Secondly, it is designed to boost zero-emissions vehicle sales with a goal that half of all new vehicles sold in 2030 are EVs.
Layer on that, as early as this week, the Environmental Protection Agency (EPA) may issue emission control regulations that will affect model years 2027 through 2032 vehicles. They do not ban internal-combustion engines but certainly will encourage EV purchases.
These goals also support a separate national security objective: to free the U.S. and its allies, as much as possible, from dependence on supply chains it sees as vulnerable to China and other countries termed as FEOC (a foreign entity of concern).
The U.S. government’s concern for national security is that essentially all lithium, graphite, battery-grade nickel, electrolyte salt, electrode binder, and iron phosphate cathode material are produced abroad. And China controls the supply chains for many of these key inputs.
The administration views tax credits as an essential tool to encourage EV purchases and, at the same time, address the sourcing issue.
In particular, for an EV sold in America to qualify for the full $7,500 credit, it must meet a North American assembly requirement, price and buyer income eligibility caps, and battery and critical minerals sourcing rules.
This will eliminate many EVs as they are not made or assembled in North America. Although some EVs may qualify for partial rebates: the batteries need to be assembled or produced in the U. S.; and 40% percent of the critical minerals must be sourced in America or with a free trade partner. For the latter, the percentage will increase to 50% in 2024, 60% in 2025, 70% in 2026, and 80% after 2026.
Specifically, under the Inflation Reduction Act, vehicles that use batteries that contain (i) any “applicable critical minerals” that were extracted, processed, or recycled by an FEOC or (ii) any component manufactured or assembled by an FEOC would be ineligible for the $7,500 Section 30D consumer tax credit (Sec. 13401(e)(7)) starting after 2023.
These prohibitions will take effect in 2024 for EV battery components and in 2025 for “applicable critical minerals.”
This is of deep concern to foreign battery manufacturers. For example, Korea is one of the leading battery providers besides China. But, many Korean battery manufacturers still source battery components and/ or critical minerals from China. And, not all are producing or, as of yet, assembling batteries in the U.S.
To mitigate this, the Korean government has just announced it would step in to help fund the development and construction of Korean battery companies in the USA. This will include the Export-Import Bank of Korea and the Korea Trade Insurance Corporation in providing loans and guarantees worth 7 Trillion Won (about $5 Billion, plus U.S. dollars) over the next five years to support Korean battery and material companies’ investment in facilities in North America.
Dealing with the sourcing issue, as many of the critical minerals still come from China, the South Korean Ministry of Trade, Industry, and Energy is also providing intensive support to materials and mineral companies.
In the short term, automotive strategist Ian Beavis noted that most of the disruption is now among America’s car dealers, and their customers in the market for an EV. Both are trying to discern what will qualify for the federal rebate. The IRS will post an updated list with eligible vehicles and credit amounts on April 17, 2023.
Looking forward, the sourcing bans now in place for EVs may soon carry over to other funding under the Biden Administration programs, such as The Energy Act of 2020, and the Bipartisan Infrastructure Law (BIL), which, together with the IRA, offer billions of dollars to the Department of Energy, Department of Transportation, and Department of Defense–funded government programs.
Many U.S. companies involved with batteries outside the EV business now have grants or funding tied to government programs and may have to restructure their sourcing quickly.
This may also include American-made government-funded end users providing related technology, such as charging stations, Electric Storage Systems, and infrastructure equipment that source their batteries and will need to comply.
IRS Fact Sheet
About the author
For nearly 30 years, Don Southerton has advised Korean firms with their businesses in the United States and globally, notably the Hyundai Motor Group and the SK Corp. He has also worked with American firms’ M&A and FDI teams as part of their business expansions into South Korea. Most recently, his focus has been on mobility and related technologies. He currently serves as Chief Development Officer of Grinergy USA. www.bridgingculture.com.
On a personal level, Don is an accomplished martial artist and master instructor, an inductee in the Official Taekwondo Hall of Fame, and served as head instructor and coach at the United States Military Academy at West Point.