The Biden administration detailed new criteria for an electric-vehicle tax-credit program, a change that officials said they expect will reduce the number of eligible models.
The new rules, issued by the Treasury Department Friday, aim to make the U.S. less reliant on batteries and critical minerals shipped from China. For car buyers to claim the full $7,500 tax credit, the batteries must contain set amounts of components made in North America and critical minerals sourced in the U.S. or from certain friendly countries.
The criteria will take effect on April 18, when a list of models that qualify for the tax credit will be issued. Until then, consumers can claim the full tax credit when they buy vehicles that are currently eligible, before some are expected to drop off the list.
The program is part of the Inflation Reduction Act, a broad clean-energy, tax and healthcare law passed last year. It is designed to make electric vehicles more affordable and accelerate the shift to clean energy by updating a previous tax-credit program.
John Bozzella, president and chief executive of the Alliance for Automotive Innovation, a top auto industry group, said only few of the electric-vehicle models that are currently for sale will qualify for the full $7,500 credit under the new criteria. Mr. Bozzella added that he doesn’t yet know which makes and models will. Individual auto makers will report to the government in the coming days which models meet the mineral and battery-component requirements.
Currently, 43% of electric vehicles on the market are eligible for the tax credit, down from 92% before the IRA last August required that vehicles be manufactured in North America, according to the alliance.
“In fact, this period may go down as the high water mark for EV tax credit eligibility since the IRA passed last year,” Mr. Bozzella said in a blog post. More than 282,000 electric vehicles sold in the U.S. in the October-December quarter last year, up 51% from a year earlier and making up 8.5% of all vehicle sales, the group said.
Writing the new rules has been a headache for the Biden administration, under pressure from trading partners that said the legislation would harm their auto makers. Some allies said they are still negotiating with U.S. officials to make sure they are covered by a key aspect of the rules.
While companies have increased assembly of electric vehicles and batteries in the U.S., China dominates the global critical-minerals supply.
“Put simply, we want to end this overreliance,” an administration official said. “And we now have tools in our tool belt.”
Part of the Inflation Reduction Act’s electric-vehicle tax-credit program went into effect on Jan. 1, without the critical-mineral and battery-component rules. Until mid-April, all electric vehicles assembled in North America and priced below certain levels—$80,000 for sport-utility vehicles and pickup trucks, and $55,000 for other vehicles—will be eligible for the full $7,500 credit. Currently, over 20 models qualify.
When the new rules kick in, a vehicle will need to meet the critical-mineral rule to be eligible for $3,750 of the tax credit. That requires at least 40% of battery minerals, based on value, to be extracted or processed in the U.S. or countries that have free-trade agreements with the U.S., or recycled in North America. That ratio will rise to 80% by 2027.
To qualify for the rest of credit, vehicles will have to meet the battery-component criteria—at least 50% manufactured or assembled in North America, climbing to 100% by 2029. The guidance released Friday spells out how companies should calculate these percentages.
The program has income caps of $300,000 for married couples, $225,000 for heads of households and $150,000 for others. Friday’s rules make clear that corporations and other entities that don’t report adjusted gross income are eligible for the credit.
A separate program for commercial vehicles offers tax incentives without local-assembly or battery-sourcing requirements, making a wider range of vehicles eligible for the benefit if they are bought by businesses for leasing or rental.
Administration officials expect the number of vehicles for which consumers can claim the full tax credit to decline temporarily with the introduction of the new criteria. In the long term, they say new domestic vehicle and battery plants being built by U.S. and foreign companies will mean more cars will be eligible. Since the introduction of the Inflation Reduction Act, companies have announced plans to build 75 facilities with a total investment of more than $45 billion, administration officials say.
The new proposed rules were rolled out three months after the original target date, as administration officials tried to address concerns raised by trading partners and lawmakers. Although the guidance takes effect next month, it isn’t final and will go through a 60-day public-comment period.
Some lawmakers say the Treasury Department has interpreted the law too broadly. Sen. Joe Manchin (D., W.Va.), the author of the EV program, criticized the administration’s reading of the law in the new rules, saying it allowed for more participation of foreign companies than intended.
“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,” he said. “American tax dollars should not be used to support manufacturing jobs overseas.”
The EV rule also has prompted spats with allies, including the European Union, South Korea, Japan and the U.K., which said the local-assembly and battery-sourcing requirements discriminate against their companies. Complaining that the U.S. subsidy program will redirect business investments from Europe to North America, the EU recently beefed up its own clean-energy subsidies.
The Treasury Department listed more than 20 countries, including Australia, Canada, Mexico and South Korea, as free-trade agreement countries that qualify under the critical-minerals rule. While a recent announcement to forge a bilateral critical-minerals agreement added Japan to the list, the EU and the U.K. remain ineligible.
“We’re quite optimistic that we can reach an agreement of the same sort of substantial scope as the Japanese,” Margrethe Vestager, the EU’s executive vice president and commissioner for competition, said Thursday. Ms. Vestager is meeting Treasury Secretary Janet Yellen in Washington Friday.
The administration will later issue guidance on another key aspect of the electric-vehicle program: a rule on “foreign entities of concern,” which will make vehicles ineligible for the tax credits starting next year if their batteries contain any components or critical minerals sourced from an entity linked to China or other adversaries.
This is seen as an especially high hurdle for auto makers, as numerous joint-venture operations between companies from China and companies from the U.S. and friendly nations currently play significant roles in EV-battery supply chains.