2022’s Inflation Reduction Act contains more climate provisions than any other American legislation in history. It includes a sweeping revision of the EV tax credit system alongside many other energy policies. These include funding for EV recharging network construction and other financial incentives.
While it’s clear the Act has shaken up the renewable energy and EV world, there’s still debate about its results. Some commentators say it’s a huge help to the EV scene by lifting the 200,000 sales cutoff. Others claim it will actually hold back EV adoption by making tax credit requirements too limiting. Here’s a closer look at ways the Inflation Reduction Act’s climate provisions could change the electric vehicle market’s fortunes.
The Climate Bill’s Direct EV Effects
The Act’s most direct influence on EV sales comes from the new Clean Vehicle Credit rules. This update to the EV tax credit systems scraps the Plug-In Electric Drive Vehicle Credit, which based tax credit amount on battery size, topping out at $7,500 for a 15-kWh battery. It also stopped offering tax credits for any company with total EV sales above 200,000 vehicles.
The Clean Vehicle Credit has a more complex set of rules. EV passenger cars only qualify if they cost $55,000 or less. The threshold for vans, pickup trucks, and SUVs is $80,000. The buyer’s income also determines eligibility, with singles no longer qualifying above $150,000 and higher amounts for couples.
At the heart of the new tax credit system is a battery manufacture clause. The Act demands the “critical minerals” used in an EV’s battery come from the USA or a country with a US free trade agreement. Meeting this criterion gives the EV a $3,750 tax credit. The other $3,750 out of the maximum $7,500 comes from having 50% or more of the battery assembled or made in the USA. This amount increases to 60% by 2025, then 10% per year until 100% in 2029. As an additional hurdle, final assembly of the EV must occur in the USA.
Clean Vehicle Credit Pros
The Clean Vehicle Credit could be beneficial in a few ways. Removal of the 200,000-sale cap on the tax credit makes qualifying EVs more attractive beyond the original production run. This could both stimulate ongoing purchases and encourage companies to develop their EV lineup.
Only a limited number of EVs currently qualify, but some apparently do. The US Department of Energy released a list of electric vehicles that might meet the final assembly requirement. The key word here is “might” – even the government itself, creator of the new rules, isn’t sure which existing EVs qualify. 24 hybrids and EVs make up the list and look likely to meet the final assembly qualification. Another10 more EVs probably qualifying but blocked from tax credits until 2023 by the outgoing 200,000-sale limit are included.
The new Clean Vehicle Credit rules also prompted one automaker to start US manufacture of a new model. Volkswagen now plans to build a new Standard trim ID.4 EV crossover SUV in America. Building the vehicle locally brings down costs, enabling an under-$40,000 price tag. Volkswagen is partnering with SK On to make ID.4 batteries in Georgia, using “critical minerals” like lithium sourced in Australia. Other manufacturers might follow suit, an Inflation Reduction Act benefit.
Importantly, the Act’s new tax credit rules also added a potential $4,000 tax credit for used EVs. The first of its kind, the used EV credit is available for pre-owned EVs costing $25,000 or less. While few models currently qualify, the credit will probably cover newly launched affordable EVs like the Volkswagen ID.4 Standard. Lower-income buyers previously looking at a more affordable used gasoline model might switch to an EV with this money-saving incentive.
Clean Vehicle Credit Cons
While the Inflation Reduction Act’s Clean Vehicle Credit could be a boost for EVs, it’s not without its critics. EnergyWire quotes an executive from E Source, an energy sector analysis firm, regarding a major potential problem. VP Sam Jaffe says that the “critical minerals” sourcing and North American battery assembly percentage rule “sounds like a morass to try to figure out.” Jaffe notes the government has no existing procedure for reporting or inspecting battery material source.
Compelled to make batteries with “critical minerals” sourced from the USA or an ally, but with no way to report or confirm this sourcing, companies may simply have no way to comply. As a result, they might offer EVs with no tax credit even if the EVs would theoretically qualify.
A Bloomberg Opinion columnist also pointed out the tax credit rules could backfire in another way. The Act could derail South Korean and Japanese manufacturers building battery factories in the USA. Automakers from the two nations are spending billions to build hundreds of gigawatt hours’ worth of factories in 14 states. These companies include Samsung, SK On, Toyota, Panasonic, Honda, and LG. But the “critical minerals” requirement cuts off use of Chinese lithium. The Asian carmakers could lack raw materials to complete significant numbers of EVs in the USA as a result.
Other commentators point out the rules have been introduced suddenly, with no period of overlap between the systems. The new rules are almost impossible for manufacturers to adapt on short notice and may confuse buyers. EV maker Rivian calls the Act a “rug pull” for American automakers, whose EVs usually cost more. The company urges a two-year grace period during which the old tax credit also continues to apply.
The Act and Commercial EV Trucks
While passenger EV tax credits naturally draw most attention the $7,500 Clean Vehicle Credit isn’t the Act’s only EV provision. It also gives up to $40,000 tax credit for every EV commercial truck or commercial vehicle that a business purchase. Firms have a more streamlined process to obtain the tax credit, CNBC reports.
There are no final assembly or “critical mineral” percentages here, or income and vehicle price limits. The only qualifiers are that the depreciation allowance applies to the vehicle and the buyer pays taxes as a business entity. Vehicles under 14,000 lbs. can get $7,500 maximum tax credit, while those over, can qualify for up to $40,000. The exact amount is determined by an “incremental cost” comparison to an ICE equivalent, and 30% of the EV’s price.
The up-to-$40,000 commercial vehicle tax credit has already shaken the Tesla Semi out of a years-long limbo. Originally promised for 2019 delivery, the Tesla Semi EV truck fell through the cracks and appeared to be vaporware for some time. Elon Musk says the first deliveries will start on December 1st. The Tesla CEO also declares he’s moving Semi manufacture to Gigafactory Texas, where Tesla will eventually build 50,000 Semis yearly.
By providing an economic viability boost to EV semis, the Inflation Reduction Act probably triggered a renewed interest in Tesla. The Act could provide a similar stimulus to other EV commercial vehicle makers and might even inspire fresh startups.
Building Out EV Charging Infrastructure
The Act promotes extension of the EV recharging network with tax credits and other incentives. One of these is the Alternative Fuel Refueling Property Credit, a program helping business owners add EV chargers. The tax credit is only for businesses and only applies to Level 3 DC fast chargers, not Level 2 chargers. Tritium Charging reports the tax credit is up to 30% of charger installation price, capped at $100,000.
The government offers another $7.5 billion in funding to companies building fast charger networks. This package has prompted some well-established manufacturers to start building direct current fast chargers for EVs. One such company is Lincoln Electric, which makes high-quality commercial welding machines. Lincoln Electric’s expertise in all-weather, all-climate welders translates to fast chargers, quite similar to welding machines in design. The company says it can make DC fast chargers better able to withstand harsh outdoor conditions. This could be important for bringing fast charging networks to colder states like Alaska or those in the Upper Midwest.
Financial incentives from the Act may also prompt some charger network owners to open proprietary chargers to all EVs. Tesla plans to open its SuperCharger network to other EVs in the USA, as it already does in Europe. A person only needs an adapter for standard CCS fast charger connections. Upcoming changes will greatly increase the number of Level 3 chargers available. This in turn, will make EVs more viable in America. Tesla hasn’t yet opened the chargers up.
The Inflation Reduction Act: Help or Hindrance to EVs?
Some of the doubts expressed by Inflation Reduction Act critics about passenger EV tax credits appear well-founded. Unless the government secretly has a large, well-developed system for tracking and registering critical mineral sourcing for batteries and other qualifiers, getting the tax credit could be highly improbable for many manufacturers. The abrupt change of system versus the long process of vehicle development could also create lag in compliant models arriving.
However, the Act appears to provide a boost to EV adoption in the longer term. The system’s kinks will probably be worked out and a solid basis established for individual purchaser tax credits. Even if this doesn’t happen, the commercial tax credit should accelerate the switch to EV trucks and other commercial vehicles. The $40,000 credit makes commercial EVs cost effective and should hasten their adoption. This, along with the infrastructure funding, should incentivize rapid expansion of the EV Level 3 charging network in the USA.
With superfast chargers being built, EVs will become more attractive to ordinary drivers. In short, the Inflation Reduction Act is stimulating EV adoption from more than one direction. Focusing exclusively on the individual $7,500 tax credit overlooks other ways the Act is giving EVs a short-term and long-term boost. As more EVs meet Clean Vehicle Credit guidelines, the effect will become even stronger. While it has problems to fix, the Act looks likely to speed up EV adoption in the USA.