US Treasury provides EV tax credit eligibility guidance

The US Department of Treasury has issued new guidance which aims to reduce the eligibility of EVs with Chinese-sourced components for US tax credits under the Inflation Reduction Act (IRA).

The guidance offers long-awaited clarity on the definition of the term ‘foreign entity of concern’ (FEOC), which gives greater colour on eligibility rules, long called for by the EV industry. The guidance is not yet signed into law.

The new guidelines propose that an entity incorporated in, headquartered in, or performing the relevant activities in a “covered nation” is classified as a FEOC. The term “covered nation” is used to denote countries that are considered adversaries to the US, such as China, as well as Russia, Iran, and North Korea.

The guidance “would also classify as a FEOC a company with at least 25pc voting interest, board seats, or equity interests held by the government of a covered nation”, a White House statement says.

These classifications set out the permissible extent to which US automakers may work with Chinese battery or mineral firms to make their EVs. This is because, starting in January 2024, no EV tax credit is permitted if any component in the EV battery was sourced from a FEOC.

The proposed definition of FEOC suggests therefore that any battery component sourced form a company headquartered in China or with over 25pc voting or equity interest from a government of a covered nation will be disqualified.

“This is the long-awaited ‘foreign entity of concern’ provision that clarifies EV tax credit eligibility come January,” says John Bozzella, CEO of lobby group the Alliance for Automotive Innovation. “FEOC informs not only which new light-duty EVs qualify for some or all of the $7500 [Clause] 30D tax credit in 2024, but how automakers can structure production facilities and battery supply chains to produce EVs that qualify for this customer incentive.”

But while the guidance goes some way to giving OEMs much-desired clarity, not all is yet clear under the new proposal. “We do not know yet how the FEOC rules will impact which EVs qualify for some or all of the tax credit. Time will tell,” Bozzella says.

“Only about 20 vehicles qualify now out of more than 103 EV models for sale in the US.”

Move away from China

The major upshot is that US automakers are disincentivised from relying on Chinese batteries, whether that is in the form of buying batteries directly or partnering with them to build cells in joint ventures. For example, US EV pure play Tesla’s entry-level Model Ys use a Chinese-made lithium iron phosphate (LFP) battery from market leader Catl, which will see them disqualified from subsidies.

The primary alternative route for OEMs to source compliant batteries will be through Japanese or South Korean firms. But this could lead to issues for OEMs who want to increase usage of LFP batteries, in which Chinese firms currently have a decisive lead, and pivot away from more expensive nickel manganese cobalt (NMC) batteries, in which China’s East Asian neighbours have greater competitiveness.

High-profile collaborations between US OEMs and Chinese battery firms that have been buffeted by political headwinds include Ford’s Michigan factory, given its battery licensing arrangement with Catl. Plans from China's Gotion, in which German OEM Volkswagen holds a stake to build a plant in Illinois — which reportedly has a long-term contract in place to supply a US OEM, rumoured to be GM, a Gotion customer in China — have also attracted criticism.

“US, South Korean, and Japanese-owned projects in the US could benefit from the full IRA EV incentives by complying with FEOC requirements, [but] they will need to forego competitive Chinese battery technologies and avoid sourcing critical minerals from China,” say Jane Nakano and Quill Robinson of thinktank the Center for Strategic and International Studies (CSIS).

This could cause some headaches for EV manufacturers given the cost advantage of using LFP, which may mean partnering in some way with Chinese battery companies will remain attractive. But metals price movements could offer some respite for those who want to continue partnering with more politically palatable battery makers and wait for them to catch up.

The price of cobalt, traditionally the costliest item of the three NMC components, have been falling. CIF Asia prices are down by 38pc from this time last year, according to metals price reporting agency Benchmark Mineral Intelligence.

Exemptions

The Treasury has chosen to exempt certain trace materials until 2025 to allow time for supply chains to adjust to the more stringent future rules of origin. But these exceptions have drawn criticism from Republican senator Mike Gallagher, who chairs the House select committee on the CCP.

“Treasury’s naive new regulations would open the floodgates for American tax dollars to flow to Chinese companies complicit in trade violations and forced labour abuses,” Gallagher warns, adding that “instead of securing critical supply chains and protecting vital American industries, Treasury’s rules will sell out American workers and increase our dependence on Communist China”.

Bozzella, on the other hand, welcomes the exemption, fearing that otherwise no OEMs could possibly meet the incoming eligibility requirements. “That is significant and well-advised,” he says, “otherwise the EV tax credit may have only existed on paper.

“Treasury’s effort to make the rules workable means the list of eligible vehicles will not completely disappear in 2024, which was a real worry.”