Why I Think The EV Tax Credits In The Inflation Reduction Act Will Work Out

There has been a lot of debate over the revamped EV tax credits we’re going to see as part of the recently passed Inflation Reduction Act. While there were many other things in the bill, including a controversial expansion of the IRS, the cleantech world has been focused on how the bill will affect electric vehicles. Sadly, there are no simple answers on this.

About The EV Tax Credits

Before we get into the pessimistic takes that I think are wrong, I want to make sure we’re all on the same page about what the new credits look like.

While the bill itself is an interesting read, it’s longer than all but a few novels at over 700 pages. Most people just don’t have the time to read all of that. Sadly, this includes the representatives who vote for these bills, unless they’ve got a knack for speed reading to the point where they can read Atlas Shrugged in a couple of days. But, I did find a decent summary at Consumer Reports that drills it down to just a few bullet points for our busy readers (which I’ll rehash below).

Key elements of the tax credit are:

• A new tax credit of up to $4,000 on used EVs put into service after Dec. 31, 2023.
• Removing the 200,000 vehicle phaseout trigger on tax credits that has made Tesla, GM, and Toyota electric and plug-in hybrid cars ineligible for tax credits.
• The credit for costly EVs — such as the Hummer EV, Lucid Air, and Tesla Model S and X — is abolished.
• Automakers are claiming that the guaranteed cash portion of the incentives for vehicles not manufactured in North America — such as the BMW i4, Hyundai Ioniq 5, Kia EV6, and Toyota bZ4X — have been eliminated.
• EVs must be built in North America to qualify for the credits, including batteries if they want the full credit.
• No credits of any kind apply to vehicles with battery materials coming from “foreign entities of concern” placed in service starting in January 2024 and 2025 (read all about how that affects EVs here).
• Tax credits can be transferred to the dealer at the time of sale, so that you can get the credit as a discount on the EV’s price.
• Price caps: For SUVs, pickup trucks, and vans, the maximum sales price to qualify for credits is $80,000. The credit for sedans, hatchbacks, wagons, and other cars ends at $55,000.

The Controversy

In an excellent article by the head honcho here, Zach Shahan, we learn that one of the biggest problems is the exclusion of cars using battery materials from “foreign entities of concern.” The key legislative language, from page 390 of the act, says:

‘‘EXCLUDED ENTITIES.—For purposes of 2 this section, the term ‘new clean vehicle’ shall not include—

‘‘(A) any vehicle placed in service after December 31, 2024, with respect to which any of the applicable critical minerals contained in the battery of such vehicle (as described in subsection (e)(1)(A)) were extracted, processed, or recycled by a foreign entity of concern (as defined in section 40207(a)(5) of the Infrastructure Investment and Jobs Act (42 U.S.C. 18741(a)(5))), or

‘‘(B) any vehicle placed in service after December 31, 2023, with respect to which any of the components contained in the battery of such vehicle (as described in subsection (e)(2)(A)) were manufactured or assembled by a foreign entity of concern (as so defined).’’

This sounds like an easy problem to fix, right? Just buy American! But, the sad truth is that the American market and the market outside of “foreign entities of concern” isn’t up and running much yet. China and Russia (both foreign entities of concern) dominate this market, with most of the dominating happening in China (Russia is important for nickel, but not that important, and not nearly as hard to get around as China). Worse, it takes a number of years to get mining and processing for all of what goes into batteries up and running.

Another article at CleanTechnica goes into some other controversies, including concern that dealers are going to rip people off, direct sales companies (like Tesla) might get left out, and that it could cause a shift to PHEV production to meet the battery restrictions. Here’s a Twitter thread by a Tesla superfan friend of mine that stimulated the above article:

Let's be very clear about what the Senate did today: They killed the EV tax credit.

EVs were gaining way too much momentum. Tesla's success is starting to scare legacy auto. So the fossil fuel & dealership lobby repealed the credit & replaced with a handout for themselves.

— Whole Mars Catalog (@WholeMarsBlog) August 7, 2022

Why I Think It’ll Be OK

The biggest problem is the prohibition on Chinese battery minerals, and there’s not enough time to solve that problem before the prohibitions kick in. I’ll be totally honest and make it clear that the situation of relying on China for minerals is entirely unacceptable. If you think the Communist Party has anything but its own interests in mind, and that it won’t use that against us whenever it suits them, then I have some nice land in Arizona that I’d like to sell you. It’s prime oceanfront property.

In other words, we can’t back out on that requirement or we’re selling ourselves up the river. We must cultivate other sources for battery minerals if we want the EV transition to be anything but a giant gift to Xi Jinping and his successors (assuming there are any).

But, without giving up on doing what’s right for the United States here, we still have a number of options to get through this.

First off, the price limits on the tax credit make this problem smaller. Hideously expensive and inefficient vehicles like the Hummer EV and a number of other upcoming electric trucks are already too expensive to qualify for the tax credits anyway, so they can keep buying Chinese battery materials. This means that the cheaper EVs (which already tend to have smaller batteries) can be the first ones to get battery materials from better sources.

The obvious first step in improving this situation is to focus on efficiency for cheaper EVs that qualify for the tax credit. Being able to use smaller batteries means that more EVs can be built with the limited supply.

The obvious second answer until supplies improve is plugin hybrids, which allow for an even smaller battery. These aren’t well-liked in the cleantech community, but most of the hate for them gets justified by a flawed study where company cars were sent home and the employer wouldn’t reimburse employees for electricity at home, but they would pay for gas. This obviously led to most people not plugging them in. In reality, nobody likes paying more for gas, so anybody who can plug them in will plug them in.

I’d rather see PHEVs than have more gas and diesel vehicles churned out of the factories, and anybody who thinks PHEVs are worse than gas cars has some screws loose.

Finally, I think we need to chill out on dealers. Yes, many dealers will rip you off if they can get away with it, but that has always been true. Adding in some tax credits that they can include in their ripoff schemes doesn’t mean anything new is happening. The fact is, if we don’t offer the ability to transfer credits to dealers, many people won’t be able to afford an EV, and they probably won’t get much, if any, benefit from the tax credit. So, it’s essential to the EV transition.

If we really want to keep dealers from stealing the tax credits, we need to educate our friends and families (and anyone else we can) on how they work so they can avoid getting ripped off.

Featured image provided by Aptera.