How the EV tax credits in Democrats’ climate bill could hurt electric vehicle sales

Proposed tax credits of up to $7,500 for electric vehicles under the Inflation Reduction Act could be counterintuitive for sales of EVs, according to several companies and a group representing major automakers such as General Motors, Toyota Motor and Ford Motor.

The new rules would raise a sales threshold for qualification, but would impose materials sourcing and pricing stipulations, along with personal income caps.

The federal government has used EV tax credits as a tool to promote the adoption of electric vehicles and lower the U.S. automotive industry’s reliance on fossil fuels. Electric vehicles are currently far pricier than their gasoline counterparts due to the expensive batteries needed to power the vehicles.

Automakers have relied on the credits to assist in lowering the prices on the vehicles for consumers, as costs of lithium and cobalt needed for the batteries have soared.

Opponents of the new guidelines argue that pricing and sourcing rules, specifically for crucial raw materials used for the batteries of the vehicles, are too aggressive and could result in most EVs falling out of qualification for the federal incentive, at least in the short-term. And unlike under current criteria, vehicles would have to be produced in North America to qualify for the credits.

Supporters of the new rules say they will wean the auto industry off its reliance on foreign countries, specifically China, and encourage domestic production of electric vehicles and batteries – a goal of the Biden administration.

The Democrat-spearheaded $430 billion Inflation Reduction Act was passed by the U.S. Senate on Sunday. It’s expected to be passed Friday by the U.S. House, before heading to President Joe Biden to be signed into law.

The Alliance for Automotive Innovation, which represents automakers producing nearly 98% of cars and light trucks sold in the U.S., believes 70% of electric vehicles currently sold in the U.S. would be ineligible for the tax credits upon passage of the bill.

“Unfortunately, the EV tax credit requirements will make most vehicles immediately ineligible for the incentive. That’s a missed opportunity at a crucial time and a change that will surprise and disappoint customers in the market for a new vehicle,” John Bozzella, CEO of the alliance, said in a blog post.

Bozzella told CNBC that he supports the long-term goals of the bill but argues the industry needs more time to make production plans and secure domestic materials for their vehicles. The current supply chain can’t support all the EVs that companies want to produce in the coming years, he said.

“It’s not going to happen overnight,” he said. “We need to work with our partners and public officials to figure out what’s going to work best for the consumer.”

Bozzella said the new standards “will also jeopardize our collective target of 40-50% electric vehicle sales by 2030” – a goal announced last year by the Biden administration. He said the Washington, D.C.-based trade association and lobby group will continue to push to reform the credit system if the bill is signed into law.

Democratic Sen. Joe Manchin, who spearheaded the materials sourcing requirements included in the bill, has not been open to changing the rules.

“Tell (automakers) to get aggressive and make sure that we’re extracting in North America, we’re processing in North America and we put a line on China,” Manchin told reporters last week. “I don’t believe that we should be building a transportation mode on the backs of foreign supply chains. I’m not going to do it.”

Martin French, a longtime supplier executive and managing director at Berylls Strategy Advisors USA, believes the new requirements could be a long-term benefit for the U.S. auto industry. But he said there could be growing pains along the way.

“I think there’s a little bit of negativity now, but if you look at what the (automakers) are promising, if they execute on their commitment, I see no reason why the domestically produced products should not benefit, and the consumer should not benefit,” French told CNBC.

Automakers condemning the new credits include companies from EV startup Rivian to larger foreign companies that have yet to produce many, if any, electric vehicles in North America.

“We are disappointed that the current legislation severely limits EV access and options for Americans and may dramatically slow the transition to sustainable mobility in this market,” Hyundai, which recently announced U.S. investments of $10 billion including EV manufacturing in Alabama and Georgia, said in an emailed statement.

Jeep-maker Stellantis, formerly Fiat Chrysler, said many provisions in the bill could help the company with its $35 billion electrification plans, but “the practical elimination of near-term incentives for American customers joining the shift to electrified vehicles may threaten the pace of change required to achieve a meaningful transition to sustainable mobility.”

Rivian, which began producing electric pickups and SUVs last year in Illinois, has characterized the bill as pulling “the rug out from consumers considering purchase of an American-made electric vehicle.”

James Chen, Rivian’s vice president of public policy, told Crain’s Chicago Business that the proposed regulations would favor automakers such as Tesla and GM, which have had longer to ramp up production or do some manufacturing overseas.

Tesla did not respond for comment. GM declined to speculate what, if any, of its current vehicles would qualify for credits under the bill. The Detroit automaker said the bill “aligns very well with GM’s long-term plans,” but some of the requirements would be challenging in the short-term.

“While some of the provisions are challenging and cannot be achieved overnight, we are confident we can rise to the challenge because of the domestic manufacturing investments we are making to secure a supply chain for batteries and critical minerals,” GM said in an emailed statement.

Vehicles from other EV startups such as Lucid’s pricey Air sedan and Fisker’s forthcoming Ocean, which is set to be imported from Austria, automatically wouldn’t qualify for the new credits.

The bill from Manchin and Senate Democratic Leader Chuck Schumer would also create a new $4,000 tax credit, or 30% of the sale price of the vehicle — whichever is lower — but only if the purchaser buys a car from a dealership.

French said it’s going to be up to each company to determine how important they believe the credit will be to their sales of EVs in North America.

“At the end of the day, it’s a business case on how much market share they feel they’ll use, but I think it will definitely raise the eyebrows,” he said. “If there have been some considerations to localize production, I think that this is going to stir the discussions and the emotions a bit more.”