U.S. new energy vehicle subsidies will take effect, and the effect of excluding Chinese suppliers may not be as expected

Recently, the U.S. Treasury Department and the Federal Tax Service introduced on their official websites the implementation rules related to new energy vehicle subsidies in the upcoming Inflation Reduction Act.

U.S. Treasury Secretary Janet Yellen said in the announcement, "The Inflation Reduction Act passed by the U.S. Congress last year is a once-in-a-generation piece of legislation that reduces consumption costs for U.S. consumers, builds a strong U.S. industrial base, and strengthens supply chains. ”

Janet Yellen said, "Consumer subsidies for electric vehicles will allow consumers to save $7,500 on a new new energy vehicle, which will save hundreds of dollars a year in gasoline costs, while creating new jobs in American manufacturing and strengthening our national energy security." ”

According to reports, the "Rule Proposal (NPRM), which will be officially announced on April 17 and effective on April 18, basically maintains the content of the new energy vehicle subsidies announced in December 2022 under the Inflation Reduction Act. The calculation method of the subsidy remains unchanged, and the Rules Proposal will further give a list of models that meet the requirements for tax exemption and exemption, as well as the amount of tax deduction for each model.

Want to subsidize? Not so easy

However, according to the Inflation Reduction Act and the Rule Proposal, American consumers have to cross four thresholds to receive a $7,500 subsidy for new energy vehicles.

The first threshold is the assembly of new energy vehicles in North America. According to the general requirements of the Proposed Rules (NPRM), vehicles eligible for the New Energy Vehicle Tax Subsidy must undergo final assembly in North America and not exceed the manufacturer's recommended retail price. ($80,000 for vans, pickups or sport utility vehicles, $5.50 for other vehicles.) )

The second and triple thresholds are critical mineral and battery assembly requirements. Building on the vehicle's North American assembly, the Rule Recommendations also explain how manufacturers should meet critical mineral and battery component requirements under the Inflation Reduction Act. Vehicles purchased by consumers must meet procurement requirements for critical minerals and battery components, and vehicles that meet either of these requirements are eligible for a $3,750 credit each.

First, meeting the requirements for critical minerals is eligible for a $3,750 credit, and the applicable percentage of the value of critical minerals contained in batteries is extracted or processed in the United States or countries with free trade agreements with the United States, or recycled in North America.

The proportions in 2023/2024/2025/2026/2027 are 40%/50%/60%/70%/80% respectively. According to the previous Inflation Reduction Act, key minerals are lithium, cobalt, graphite, nickel and manganese and their constituent materials.

The Rules Recommendations propose a three-step process to determine the percentage of value of critical minerals in batteries that meet requirements: 1) determine the procurement chain, 2) determine qualified critical minerals, and 3) calculate the content of qualified critical minerals.

In addition, the Rules Recommendations detail a set of deliberative principles to identify countries with effective FTAs with the United States, and the term "countries with active FTAs with the United States" is not defined in the Inflation Reduction Act.

Currently eligible countries include: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru and Singapore.

Compared with the Inflation Reduction Act of last December, the new Rules Proposal includes Japan, but does not include the EU and the UK for the time being. However, the announcement hints that the upcoming Rule Proposal could include newly negotiated key minerals agreement countries.

On March 10, US President Joe Biden and European Commission President Ursula von der Leyen issued a statement after meeting at the White House saying that the two sides agreed to negotiate key minerals used in electric vehicles to ensure that such minerals mined or processed in the EU can also enjoy new energy vehicle tax breaks in the US Inflation Reduction Act.

Second, meeting the requirements for battery assemblies qualifies for an additional $3,750 credit. Under the Inflation Reduction Act, the applicable percentage of the value of a cell module must be manufactured or assembled in North America.

The applicable ratio in 2023/2024/2025/2026/2027/2028/2029 is 50%/60%/60%/70%/80%/90%/100%.

The Rules Recommendations also propose a four-step process for determining the value of battery modules: 1) determine the manufacturing or assembly in North America, 2) determine the incremental value of each battery module, 3) determine the total incremental value of the battery module, and 4) calculate the content of qualified battery modules by dividing the total incremental value of the North American battery module by the total incremental value.

The fourth threshold is the sensitive entity exclusion requirement. The Rules Recommendations also emphasize that from 2024, eligible new energy vehicles must not contain any battery components manufactured by foreign sensitive entities, and from 2025, eligible new energy vehicles must not contain any key minerals extracted, processed or recycled by foreign sensitive entities.

The Rule Recommendation states that the Treasury Department and the IRS will issue follow-up guidance on this provision.

The supply chain is in its infancy, and the effect of the subsidy policy may not be as expected

The Rule Recommendations will be published in the Federal Register on April 17, 2023, and vehicles put into service on or after April 18, 2023 will be subject to the requirements for critical minerals and battery components set forth in the rules, according to the U.S. Treasury Department. At that time, the DOE website will list eligible car models and subsidy amounts. From January to April 17, 2023, the requirements for critical minerals and battery modules will be suspended, and new energy vehicles that meet the price requirements for vehicle manufacturing in North American countries will be eligible for full tax credit.

According to the list on the official website of the US Department of Energy, as of March 31, a total of 39 models and configurations from Tesla, Volkswagen, Ford, Nissan and other car companies met the requirements of North American vehicle manufacturing, and whether the above model configurations meet the eligibility and the proportion of tax credits after April 18 are subject to guidance. According to Tesla's official website, the rear-drive version of the Model 3 will not qualify for the full tax credit after April 18.

After the Treasury announcement, the Financial Times reported that it is expected that fewer models eligible for taxes will continue to decrease in the future.

The Automotive Innovation Alliance, the largest U.S. auto and battery trade group, said few models are expected to qualify for the full tax credit and that automakers still face many problems with procurement requirements. According to the alliance, about 43% of electric vehicles in the US market are currently eligible for tax credits, compared with 92% before the enactment of the Inflation Reduction Act, when the source of key minerals and components for batteries was not required.

Since the enactment of the Inflation Reduction Act, the private sector has announced at least $45 billion in investments in the U.S. clean car and battery supply chain, according to the U.S. Treasury, but a Financial Times analysis shows that the U.S. EV supply chain is still in its infancy despite this.

The Inflation Reduction Act has caused displeasure in Canada, and the subsidy war has begun

The Inflation Reduction Act is legislation enacted by the U.S. Congress last year to promote clean energy production and localized manufacturing. Tax credits for new energy vehicles are just some of the $369 billion in subsidies the bill provides.

However, on April 2, Canada's Minister of Natural Resources, Jonathan Wilkinson, said in an interview with the Financial Times that the Inflation Reduction Act's "huge subsidies create a level playing field for Europe and Canada."

Natural Resources Minister of Canada Jonathan Wilkinson

"We don't want a subsidy war with the Americans, and neither do the Europeans and Japanese." Wilkinson said.

The scale of subsidies under the Inflation Reduction Act has reportedly raised concerns in Europe among governments about "capital flight across the Atlantic." During a visit to the United States last November, French President Emmanuel Macron said that the Inflation Reduction Act could "divide the West."

At present, the EU has announced a series of new tax breaks and funding packages for clean energy developers, including the previously announced Critical Raw Materials Law, as a response to the Inflation Reduction Act.

The Act sets clear benchmarks for capacity and supply diversification in the EU's strategic raw materials supply chain, including that at least 10% of strategic raw materials are extracted in the EU each year, at least 40% of strategic raw materials are processed in the EU, at least 15% of strategic raw materials are recycled in the EU, and the EU's annual consumption of each strategic raw material at any relevant stage of processing does not exceed 65% from a single third country.

On March 28, Canada's Trudeau government also announced $13 billion worth of clean energy tax incentives. Canadian Finance Minister Christia Freeland said Canada cannot "fall behind in the development of clean economies in developed countries".

"The Inflation Reduction Act is not just about winning for one country." Wilkinson argues that U.S. efforts to use the Inflation Reduction Act to "reindustrialize" it cannot be built on damaging allies.

However, during a March 25 visit to the Canadian capital, Ottawa, US President Joe Biden said that Canada's "large number of critical minerals are critical to our clean energy future." He also said the Inflation Reduction Act would "explicitly include tax credits for locally assembled electric vehicles in Canada."

According to reports, Canada has rich reserves of key minerals, such as lithium, nickel, cobalt, copper and rare earth elements. The Canadian government believes that these minerals will support it in building a lucrative battery supply chain.

In addition, in addition to the subsidy war, Wilkinson said that Canada will adopt a more moderate attitude towards China than the Biden administration. "You don't want to rely on countries that don't have your values." "But that doesn't mean we won't buy solar panels from China, and it doesn't mean we won't buy wind turbines from China," Wilkinson said. ”