Treasury’s Clean Vehicles Tax Credit Guidance Puts Us One Step Closer to a Clean Transportation Future

Buoyed by historic federal investments, climate policies, and consumer preferences, automakers are transitioning toward clean, electric cars and trucks, a transition that is key to reducing emissions from our nation’s transportation sector. And one thing that the Biden administration and members of Congress have made clear is that American workers and communities must be able to capture the economic gains associated with transitioning to electric vehicles and building a clean economy.

Accordingly, as part of the Inflation Reduction Act, Congress invested billions of dollars in making sure the vehicles of the future will be made domestically, and the impact of this legislation is already bearing fruit. Since it was signed into law, more than $45 billion in private-sector investment has been announced across the U.S. clean vehicle and battery supply chain, and the number of domestic investments is expected to increase as manufacturers work to comply with the critical minerals and battery components provisions of the law’s clean vehicles tax credit, the subject of the much-awaited Treasury Department guidance released last week.

What is the Clean Vehicles Tax Credit?

The climate law establishes and updates several critical tax credits that will increase access for Americans and businesses to clean, electric vehicle (EV) cars, trucks, and commercial vehicles. It will increase the speed of deployment for electric vehicles (and other clean vehicles) by making both new and used vehicles even more affordable, together with the necessary fueling infrastructure.

Before the climate law, only electric vehicles or plug-in hybrid electric vehicles from a company that had sold fewer than 200,000 of these vehicles were eligible for a credit worth up to $7,500 depending on the size of the battery. This program was set to expire, but thanks to the climate law, it will continue in a modified capacity through 2032 to help increase the affordability of electric vehicles, catalyze U.S. battery manufacturing and electric vehicle assembly, and increase U.S. competitiveness globally. 

The Inflation Reduction Act modified this tax program, to require that the vehicle seeking the credit be assembled in North America and that it also meets new critical mineral and battery component requirements. It also modified the program to impose income limits for taxpayers seeking to use the credit and price limits on vehicles eligible for the tax credit, to prioritize access to this credit for low- and moderate-income consumers. These modifications also seek to reduce our transportation sector’s reliance on foreign supply chains and boost domestic manufacturing. The Treasury Department and manufacturers will need to develop and operationalize the material tracing and data sharing systems which currently are in early pilot stages to determine which vehicles comply with the provisions of the law and are therefore eligible for half or all the $7,500 tax credit.

What is in Treasury’s guidance?

Consumers will unfortunately be left waiting a while longer to have full clarity on which vehicles will be eligible for a full ($7,500) or partial tax credit ($3,750), as the draft guidance released by the Internal Revenue Service (IRS) is focused on providing details on where materials and components that make up an electric vehicle battery will need to be sourced from for the vehicle to be eligible for the clean vehicles tax credit. 

Automakers and other electric vehicle supply chain stakeholders will need to review this agency guidance and certify to the agency which of their vehicles qualify for a full or partial tax credit and do so by April 17th. Then starting on April 18^th, the FuelEconomy.gov website will be updated so that consumers know which vehicles qualify for this tax credit. From that point forward, the Treasury Department has indicated this website will be updated monthly to continue to provide clarity to consumers as manufacturers work to move their supply chains into compliance with the newly modified law. Additionally, all vehicles placed into service starting on April 18^th will need to comply with the agency’s draft guidance, unless the purchaser entered a “binding agreement” with the manufacturer prior to the Inflation Reduction Act being signed into law. 

What will stakeholders be evaluating?

There are two equal halves to this $7,500 tax credit. For a vehicle to be eligible for the first half of the credit, a ramping percentage of the critical minerals used in its battery will need to be either extracted or processed in the U.S. or a select list of countries that the U.S. has certain types of trade agreements with. Minerals that have been recycled in North America can also qualify. The trade agreements provision of the guidance is flexible and allows for countries to be added or removed in response to certain considerations.

To be eligible for the second half of the credit, most of the value of the parts that make up the battery must be manufactured in North America. For both halves of the credit, the percentage of battery minerals and parts that need to meet the requirements for a vehicle to qualify for the credit increase overtime. 

In the near term, it is likely that more vehicles will qualify for the battery components half of the tax credit than the critical minerals half, since shifting global electric vehicle manufacturing supply chains takes time. While doing this will encounter challenges tied to the extraction and processing of the key minerals that comprise today’s electric vehicle batteries, the modification of this tax credit provides us with an opportunity to build up electric vehicle supply chains that are circular and incorporate recycling, as well as other best practices to avoid unintended harms and to create high-quality jobs throughout the electric vehicles supply chain. 

For more information on electric battery supply chains and key challenges, please see this blog.

What is not included?

Today’s guidance from IRS does not include decisions on several key areas, which the agency expects to rule on later this year. These include:

• Defining a “foreign entity of concern.” Starting in 2024, vehicles cannot have any battery components sourced from those entities, and starting in 2025, these batteries cannot have any critical minerals sourced from these entities.
• Guidance on how purchasers can transfer their tax credit eligibility to qualified dealers and access the credit at the point of sale, a provision that kicks in starting in 2024.
• Guidance on the newly created tax credit program for used electric vehicles, which will increase access to the majority of low-income and moderate-income households who purchase from the used vehicle market rather than new. 

What comes next?

Support for a domestic, clean vehicles industry will be crucial over the next decade, and the release of this guidance puts us one step closer to beefing up domestic manufacturing and increasing access to clean vehicles, while tackling one of the country’s largest sources of health-harming and environmentally damaging air pollution. It will be important for agencies in charge of developing and administering the clean vehicles provisions of the Inflation Reduction Act—like the IRS—to ensure that their guidance is clear and appropriately considers the realities of today’s electric vehicles supply chains, so that these programs are implemented in a way that expands consumer access, grows domestic manufacturing and assembly, and creates good, union jobs.

To ensure we stay on the right path, we will also need the Biden administration to finish the job and complement these historic clean vehicles and battery manufacturing investments with strong federal clean car standards and clean truck standards. We will also need state transportation agencies to fully take advantage of the flexibility offered by certain federal funds to expand access to even more mobility choices (like transit, biking and pedestrian options) across communities.