Manchin deal could raise new hurdles for electric vehicle incentives

Democrats’ push to boost electric vehicles could be hobbled by some of the protectionist supply chain provisions they included as requirements to get electric vehicle tax credits. 

The credits were included as part of the climate deal reached between Sen. Joe Manchin (D-W.Va.) and Senate Majority Leader Charles Schumer (D-N.Y.), even after Manchin had expressed some skepticism about them. 

In order for consumers to receive the full $7,500 for the purchase of a new electric vehicle, a portion of the minerals in that vehicle’s batteries will need to be extracted or refined from countries with free trade agreements with the United States.

Part of the credit is also tied to a percentage of battery components being manufactured in North America.

Experts and industry players have indicated that these provisions — particularly the critical minerals piece — represents a high bar, and may hamper electric vehicle adoption in the short term. 

John Bozzella, president and CEO of the Alliance for Automotive Innovation, said companies are working to bring more of their supply chain to the U.S. but that “it’s also a change that doesn’t happen overnight.” 

“A likely result of this bill (as currently constructed) is that a significant number of consumers will not be able to take advantage of this credit in the early years when it is needed the most,” Bozzella said in a statement. 

Electric vehicles have been a central component of Democratic plans to combat climate change, and EV tax credits were included in various iterations of President Biden’s Build Back Better package. 

The Manchin-Schumer bill gives tax credits worth up to $7,500 to consumers to incentivize the purchase of new EVs, but half of those credits — amounting to $3,750 — is dependent on where the minerals in its batteries come from. 

The legislation mandates that 40 percent of the value of the minerals used in the electric vehicles’ batteries are extracted or processed from countries where the U.S. has a free trade agreement, and ratchets up over time. 

For 2024, it increases to 50 percent, and continues upward until 2027, when 80 percent of the minerals used must come from these countries.

An auto industry source told The Hill they believe there are currently no electric vehicles on the market that meet this requirement. 

“I think it’s going to take several years to get there,” said Duncan Wood, vice president for strategy and new initiatives at the Wilson Center.

Wood added that the fact that the requirements ratchet up over time “presents a challenge” but said that with enough effort, they may be achievable.

“If you have the time, if you have the right incentives for the mining sector and if you have the processing and refining plants being built, then it’s entirely possible that you could meet some of those targets,” he said. 

“It’s going to take a Herculean effort to get there,” he added. “The good thing about this legislation is that it does provide those deadlines and those deadlines will be an incentive for people to move forward.”

The U.S. has free trade agreements with some major mineral producers like Australia and Chile, but doesn’t have any such agreement with other major producers like China, Russia and the Democratic Republic of the Congo. 

“The numbers that they quote in there are very high and very soon,” said Morgan Bazilian, a  public policy professor at the Colorado School of Mines.

“Will those targets become a hindrance or an obstacle to the adoption of electric vehicles with those targets? Yes, if they are adhered to precisely and exactly,” he said. 

The bulk of the world’s mineral refining is done in China. 

“If you look across the battery materials from lithium, cobalt, manganese, nickel, graphite, you will see that almost all of them are completely processed … in China,” Bazilian said. “That ranges from 75 to 100 percent for all of the things I just mentioned.”

E&E News previously reported that some of the supply chains required by the credit don’t exist. 

The other half of the credit is tied to battery components being manufactured in North America. 

Ethan Elkind, director of the climate program at the University of California, Berkeley’s Center for Law, Energy and the Environment, said that while he believes most battery manufacturing is happening offshore, companies may be able to bring it to the U.S. relatively rapidly. 

“They can get these facilities up and running sometimes pretty quickly, but it depends on the state because permitting challenges can definitely hold back some of this manufacturing,” he said. 

The industry source noted that the stipulations may not just limit new adoption, they may also pause existing tax incentives for consumers who purchase an electric vehicle. 

Current credits are capped at 200,000 vehicles per automaker and phase down from up to $7,500 per vehicle after that. Some automakers either haven’t met the cap or are currently in the phase-down period, but their customers stand to lose that credit moving forward if their vehicles don’t meet the new requirements.

The source said there is a push for changes to the bill, including moving back the timeline for some of the stipulations. Bloomberg reported that Ford, General Motors, Toyota and Stellantis are involved in those efforts.

In a statement on Monday, GM described some of the provisions as “challenging” and said that they “cannot be achieved overnight.” 

Caps on both consumer income and vehicle value — which limit the credits to vans, SUVs and pickups $80,000 or less, and other vehicles costing $55,000 or less — are also posing hurdles for some automakers. 

Jim Chen, Rivian’s vice president of public policy, said that based on his company’s current trajectory, the credit wouldn’t be able to work for the company’s consumers until 2025, because its vehicles are too expensive. 

“The new proposal pretty much cuts us off at the knees. … It basically renders our vehicles ineligible,” said Chen, noting that his company was also pushing for changes.