EV Tax Credits May Not Spur Widespread Adoption

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The recently passed Inflation Reduction Act significantly changed electric vehicle (E.V.) tax credits. While Energy Fairness enthusiastically supports E.V.s, we have to wonder whether the tax credit changes will help speed the E.V. transition. We’re not alone in our concerns. In fact, U.S. automakers worry that up to 70% of E.V. models may not be eligible.

The Inflation Reduction Act includes a $7,500 tax credit for new E.V.s and $4,000 for used ones. However, there are significant restrictions on what qualifies. For example, beginning in 2023, eligibility for the full credit requires 40% of the vehicle’s critical minerals be mined or processed in the U.S. to qualify for the new vehicle credit. Alternatively, the vehicle can be processed in countries with which the U.S. has a free trade agreement or recycled in North America. 

Sourcing rare earth minerals from U.S.-based companies is a laudable goal, one we’ve expressed our support for repeatedly over the years. However, China and other countries hostile to the U.S. have currently cornered the market on critical minerals. While the U.S. has made great strides in sourcing our own minerals, relying solely on domestic supplies or friendly nations for imports will take longer. Ultimately, though, we hope that this new law will spur investment in domestic mining, eventually helping drive down the costs of E.V.s.

“Hitting those thresholds will require major efforts,” says a BofA Global Research report. “Indeed, materials account for almost two-thirds of E.V. battery costs. Given where supply is coming from, the targets may be easiest to achieve for lithium and more difficult for nickel.”

“The industry needs to keep a focus on boosting lithium production, potentially also in the U.S.,” BofA Global analysts added.

The mineral issue isn’t the only factor limiting E.V. tax credits. There are also income restrictions for the first time. The income cap is intended to help incentivize low-income consumers to purchase an E.V. However, even with a credit, these vehicles can be prohibitively expensive for many families. Currently, the average price of an E.V. is $66,000, nearly $20,000 more than a traditional gas-powered vehicle. Even with tax credits and savings on gas, the sticker shock may keep middle-class families from taking the plunge. Moreover, wealthier shoppers may lose interest without tax credits as an incentive.  

“That’s not going to fit in a lot of people’s monthly budgets at this point in time,” says Jessica Caldwell, executive director of Insights at Edmunds. “They [automakers] have to introduce the more expensive, more costly, higher-margin vehicles first to make the money to start to finance some of the lower-cost vehicles.

On the other hand, the Inflation Reduction Act removes the 200,000-unit-per-manufacturer sales cap on E.V. tax credits. That means that E.V.s built by Tesla, GM, and Toyota will again be eligible, providing their minerals are appropriately sourced. 

The future of E.V. tax credits seems complicated, but hopefully the auto industry and the Biden Administration can work together to make E.V.s more accessible for everyone in the market for one.