Proactive Investors - The Biden administration has unveiled new criteria for the Inflation Reduction Act's (IRA) consumer electric vehicle (EV) tax credit, specifying that EVs made with minerals and materials from China won't qualify in the future.
The US Department of the Treasury and IRS have released proposed guidance on the clean vehicle provisions of the Inflation Reduction Act (IRA), aiming to lower costs, stimulate US manufacturing, and enhance energy security.
The IRA's clean vehicle tax credit, which has already attracted nearly $100 billion in private-sector investment, supports consumers with savings on new clean vehicles, while creating jobs and fostering a resilient domestic supply chain.
The move provides much-needed clarity for EV manufacturers but poses a significant challenge for companies to reorganize supply chains for battery parts and minerals outside of China. Starting in 2024, EVs can't use battery components from a "foreign entity of concern" (FEOC), expanding to include minerals in 2025, prompting a race for automakers to adapt or risk losing tax credits.
Impact on EV industry dynamics
In addition to FEOC requirements, clean vehicles must meet statutory criteria, including additional sourcing mandates for critical minerals and battery components, final assembly in North America, and price caps of $80,000 for certain vehicles. The NPRM outlines proposed rules for due diligence and tracing industry standards, emphasizing the need for compliance throughout the manufacturing and assembly process.
To facilitate the transition, the NPRM suggests temporary rules, allowing the industry to develop precise tracing standards for low-value materials until 2026. The proposal also introduces an upfront review system starting in 2025, providing oversight and certainty to manufacturers, with the IRS tracking FEOC compliance via a compliant-battery ledger. The proposed enforcement framework includes incentives for compliance and penalties for fraud or intentional rule violations.
The battery component requirement mandates an increasing percentage of manufacturing or assembly in North America, starting from 50% in 2023 and reaching 100% in 2029. Similarly, the critical mineral requirement necessitates a growing percentage of extraction, processing, or recycling in the US or countries with free trade agreements, ranging from 40% in 2023 to 80% in 2027.
Industry applause
The move was applauded by North American companies involved in the domestic electric vehicle supply chain.
Strong FEOC regulations, coupled with rigorous enforcement mechanisms, will effectively deter “mineral laundering" schemes and foster the implementation of "know your supplier" systems, according to Talon Metals Corp. (TSX:TLO, OTC:TLOFF) CEO Henri van Rooyen.
“These rules also ensure that investors in the battery supply chain in the US or free trade agreement allies won't be undercut by cheaper inputs produced in countries that do not share our high standards for environmental protection, strong labor laws or support the participation of indigenous people in the clean energy transition,” van Rooyen said.
In essence, the proposed guidance seeks to fortify the clean vehicle supply chain, reduce foreign dependency, and incentivize domestic manufacturing, aligning with President Biden's goal of reversing the trend of job outsourcing and bolstering the U.S. electric vehicle future.
First Phosphate Corp. (CSE:PHOS) CEO John Passalaqua called it a “massive piece of legislation.”
“What they've done here functionally, is they've closed all the loopholes, and they've tried to get back to what they want, which is a fully North American based supply chain,” he told Proactive.
The guidance is subject to public comments, with Treasury and the IRS considering feedback before finalizing the rules.