October 6, 2022
  • October 6, 2022

Senate climate agreement: Boost or barrier for EVs?

By on July 29, 2022 0

The Senate’s sweeping climate and energy bill would do nothing less than reshape car manufacturing in the electric age, giving automakers nearly irresistible incentives to build America’s supply chains – or more precisely, not in China.

In achieving that goal and a long list of others related to electric vehicles, the bill — which resulted from an agreement between Senate Majority Leader Chuck Schumer (DN.Y.) and the Chairman of Energy and Natural Resources Joe Manchin (DW.Va.) — invents new rules the government has never applied to vehicles, leaving some experts scratching their heads over how it’s supposed to work in practice.

“This bill is intended to build domestic electric vehicle manufacturing capacity,” said Nick Nigro, founder of Atlas Public Policy, an electric vehicle consultancy.

He and other EV advocates applauded the bill’s ambition and scope.

“It accelerates the market and creates more certainty in the market,” said Ben Prochazka, executive director of the Coalition for Electrification, a nonprofit that advocates for the adoption of electric vehicles.

However, some congressional watchers have questioned whether the proposal, called the “Cut Inflation Act of 2022,” might have created unrealistic targets that could end up slowing the adoption of electric vehicles.

The bill’s introduction came during a head-turning week when Congress, after decades of inaction, passed an industrial policy to counter China.

On Wednesday, the Senate passed a sweeping $280 billion bill to boost domestic computer chip manufacturing, and yesterday that bill passed the House of Representatives and is on its way to President Biden for signature. (E&E News PMJuly 28).

The Manchin-Schumer agreement is not limited to manufacturing. It is dedicating billions of dollars in tax credits and spending programs that would create a market for used electric vehicles, build charging stations in poor neighborhoods, and more.

Tax credits as industrial policy

The centerpiece of the bill is a monumental change to the electric vehicle tax credit, which is the US government’s main lever to encourage Americans to buy electric vehicles.

Essentially, the changes make the tax credit an extension of US industrial policy by requiring that a large portion of the battery come from the mine, either in America or in an allied country.

The rules align with a widely shared political goal in Washington that the United States needs to develop its own supply chain for electric vehicle batteries that does not depend on China. But some experts have called the tax credit’s aggressive timing nearly impossible.

“There’s not a single car in the world that qualifies right now,” said Sam Jaffe, vice president of battery solutions at E Source, an energy consultancy.

Since Congress established the credit in 2007, it’s been pretty simple: buy a new electric vehicle and get a $7,500 credit applied to that year’s taxes.

This incentive has reached its limits as vehicles from each automaker are only eligible up to 200,000 units sold. Tesla Inc. and General Motors Co. have reached this limit, and Toyota Motor Corp. and Ford Motor Co. will soon reach theirs.

Under the new regime, the $7,500 incentive would remain, but would be underpinned by a different set of priorities that would have a profound impact on automakers.

Instead of being limited in the number of vehicles they could sell, automakers would have to meet strict manufacturing and content requirements for their batteries.

Half of the incentive — $3,750 — would only be available to automakers whose batteries depend on critical minerals made in the United States or in countries with which the United States has free trade agreements. The other $3,750 requires the battery components to be manufactured and assembled in North America.

Each starts next year and increases in percentage each year.

For example, the critical mineral content of an EV battery must be 40% by the end of next year and 80% after 2026. A battery must be 50% assembled in North America by by the end of 2023 and reach 100% by 2028.

In both measures, by 2024 the car is excluded from credit if it contains critical minerals from a “foreign entity of concern”.

While several countries could fit that definition, experts said it’s an unmistakable signal to automakers that they’ll need to avoid sourcing from China if they want their customers to benefit from the waiver of tax.

Congress watchers say the impetus to create the new system came from Manchin and reflects his desire to wean U.S. automakers from their overwhelming reliance on China for the expensive, high-tech processing effort. key minerals that go into lithium-ion batteries.

“For Manchin’s purposes, it’s China,” said Andres Hoyos, vice president of the Zero Emission Transportation Association (ZETA), an electric vehicle lobby group.

Earlier iterations of a reconciliation package did not focus on global competition but on unions, offering deep subsidies to cars made with union labor. Manchin has clearly expressed his displeasure with this idea.

E Source’s Jaffe said the US government does not have a system in place for automakers to report the contents of their batteries and that would be a complicated task.

“It feels like a quagmire trying to figure out: where did this stuff come from? How much is in it? And does it matter? he said.

The likelihood that automakers won’t be able to meet the requirements, at least initially, would in turn mean that credit would not be available to consumers, which could dampen electric vehicle sales, some say. analysts.

“It would be hard for an existing manufacturer to say they are fully compliant with this,” Nigro said.

Another change to the tax credit is that, for the first time, it will target low-income buyers. The aim is to encourage the spread of electric vehicles beyond the first wealthy users, but some experts question whether this will work as intended.

Only singles earning up to $150,000 or married couples earning up to $300,000 will qualify for the credit. The price of vehicles will also be limited: SUVs and pickup trucks with list prices up to $80,000 and all other vehicles at $55,000.

Prochazka of the Coalition for Electrification said an unintended consequence of the limits could end up discouraging sales to wealthier people who are hesitant about electric vehicles.

“It would be nice if [the limits] were a bit higher,” he said.

The same dampening effect could occur for low-income shoppers, he said. “If a consumer walks into a dealership and the first question the dealership has to ask is, ‘What is your household income?’ – which immediately establishes a potential bearish cycle,” he said.

Incentive stew

Until now, there was no particular incentive for Americans to buy used electric vehicles. But that will change drastically if the bill becomes law.

A buyer of a used Nissan Leaf or Tesla, for example, will get a $4,000 tax credit on the purchase. The vehicle must be at least two years old. As with the New Vehicle Incentive, there are income requirements, but lower: singles up to $75,000 and married couples up to $150,000.

“It’s absolutely massive,” ZETA’s Hoyos said, calling it a “sleeping issue” that could get a lot more people into electric vehicles.

“The more we are releasing right now that are new, the more they are going to flock to the used market,” he added.

The bill is also full of provisions that grease the skids as automakers embark on the path to electrification.

They include $2 billion in grants to retool existing factories for electric vehicle production and $20 billion in loans to build new electric vehicle factories. A production tax credit would create generous incentives per kilowatt for factories to produce battery cells and modules.

Other provisions are not specific to electric vehicles but could be targeted there, such as a $10 billion investment tax credit to create clean energy manufacturing plants and $500 million in the law. on defense production partly intended for the processing of critical minerals.

As automakers and battery makers have unveiled plans for large factories, especially where they have been wooed by local officials in the southeastern United States, the new policies could “ensure that some of those benefits are more evenly distributed,” Nigro said.

Additionally, the Senate proposal takes existing tax credits for building electric vehicle charging stations and makes them much more generous. But there is an intriguing catch: they can only be built in the poorest communities.

Charging station incentive increased from $30,000 to $100,000. It also multiplies by applying – not just to a property, but to unspecified “elements” on that property.

It’s unclear what this means, but “items” could mean individual charging pods meant to power two cars at once. Since charging stations usually have more than one such pedestal, the incentive could be appetizing for developers.

The tax deduction is only available in urban census tracts where the poverty rate is at least 20% and in more rural areas where the sector generates 80% or less of state revenue.