Seeing the Forest for the Trees: Smart Industrial Policy in the Updated Clean Vehicle Credit
By Reem Rayef, Senior Policy Advisor
With the passage of the Inflation Reduction Act last year came Congress’ framework of an updated clean vehicle consumer tax credit that strikes a tough balance. It accelerates the deployment of clean and electric vehicles (EVs), while incentivizing automakers to secure and bring their auto manufacturing supply chains to the U.S. Last week, the U.S. Treasury Department published highly-anticipated guidance and notice of proposed rulemaking, laying out precisely how automakers must interpret and comply with the tax credit’s requirements and marking its full implementation. The tax credit’s novel approach has been significantly scrutinized by a range of stakeholder groups and the full political spectrum. They are all wondering: how will the credit impact EV uptake and manufacturing in the U.S, and the global vehicle market?
Here’s a reminder of how the credit works.
The $7,500 maximum tax credit gives cash back to consumers buying qualifying new vehicles—those with at least a 7 kilowatt-hour (kWh) battery and with final assembly occurring in North America—via their federal tax return. The credit consists of two parts: a $3,750 battery components credit and a $3,750 critical minerals credit. Vehicles are eligible for the battery components credit if they meet a ramping percentage threshold of battery components (e.g. anodes, cathodes, separators, etc.) manufactured in North America. Vehicles are eligible for the critical minerals credit if they meet a ramping percentage threshold of critical minerals within the battery. The minerals must be extracted or processed domestically or in countries with which the United States has a free trade agreement, or be recycled in North America.
While a little complicated, the battery component and critical mineral requirements (plus the North American final assembly requirement) are worth sticking to, as intended by Congress. They mean that the tax credit is performing double duty. It doesn’t just speed deployment of EVs by lowering the upfront cost for new car buyers—it also functions to create tens of thousands of jobs across the auto manufacturing supply chain in the United States (in many cases, bring jobs back to the United States).North American manufacturers respond to the clear incentives created by the phased-in requirements. The updated clean vehicle tax credit models how climate policy can and must address other urgent societal needs—such as reinvestment in deindustrialized auto manufacturing communities and the restoration of good, community-supporting jobs that provide pathways to the middle class without requiring a four-year college degree.
See this factsheet for six reasons that onshoring electric vehicle and other clean technology supply chains is critical for achieving our climate goals, creating good jobs, and building a more just economy.
The stakes for current and future auto manufacturing workers, and the communities they live in, couldn’t be higher. Research from the Economic Policy Institute demonstrates that over 200,000 auto manufacturing jobs hang in the balance between two scenarios of EV deployment, The first scenario—the business-as-usual case—sees the unfettered offshoring of good manufacturing jobs due to the rent-seeking behavior of auto manufacturers. The other scenario restores the domestic auto manufacturing communities through intentional policies—such as those embedded in the EV tax credit—to onshore EV manufacturing supply chains while growing the demand for U.S.-made EVs.
The tax credit officially went into effect with the passage of the Inflation Reduction Act last August. However, until now, the battery component and critical mineral requirements have been waived while the Treasury Department sorted out the details of how exactly these requirements should work, drawing from stakeholder comments and other agencies’ expertise.
Figure: The updated clean vehicle credit performs double duty for the climate and for the economy.
And What’s Trade Got To Do With It?
For the past several months, headlines have spiraled around what the final assembly, battery content, and critical mineral requirements mean for auto manufacturers’ existing supply chains, which are largely located outside of North America. Trading partners such as the European Union, concerned about maintaining their position in the U.S. market, have suggested that the updated credit runs afoul of decades-old global trade rules—even though auto manufacturing giants like Germany have relied on similar provisions to build up their own domestic supply chains.
The critical mineral requirement has caused particular consternation among other countries with large auto companies. It specifies that eligible vehicles use batteries made with minerals extracted in countries with which the U.S. has a free trade agreement—a narrow term that actually only applies to 20 countries—most of which are not considered major sources of the critical minerals needed to make EV batteries. In response to this significant pressure from other countries, the administration has reinterpreted and broadened the definition of a free trade agreement, and quietly negotiated an ad-hoc agreement with Japan (another negotiation is underway with the European Union)to make critical minerals extracted or processed there eligible under the tax credit’s critical minerals requirement.
This is not the right precedent to set. Rapid deployment of EVs doesn’t have to come at the steep price of trade agreements that are negotiated out of sight and without any enforceable labor and environmental standards. As we shift to a clean global economy, any trade agreement should be negotiated transparently, reflect broad public and congressional input, and meaningfully protect workers and the environment.
And we get it! Getting EVs on the road is a really important part of meeting our broader climate goals, and ensuring a generous and broadly applicable tax credit can help with that. Through these trade negotiations, the Biden administration is working within the parameters of the tax credit as written by Congress to maximize deployment. But EV deployment isn’t the only objective of this tax credit. It’s also doing smart industrial policy that will support and create auto manufacturing jobs for hard-hit workers, rebuild auto manufacturing communities across the country, and secure an essential supply chain for climate action.
The Bottom Line: A Strong, Domestic, Unionized, Clean Vehicle Supply Chain Is Possible
A strong, domestic, unionized, clean vehicle supply chain is possible, and the clean vehicle tax credit—with its final assembly, battery component, and critical mineral requirements—helps us get there. Most importantly, the tax credit does not function in isolation. It’s a part of the Biden administration’s broader effort to get more EVs built and sold in the U.S.—an effort bolstered by major supply-side investment in the manufacturing of clean vehicles and their components. The Bipartisan Infrastructure Law (BIL) and Inflation Reduction Act together include a vast array of manufacturing investment programs that reward automakers for locating their new manufacturing facilities here in the U.S. (see Figure 2). These incentives are already working. Since the passage of the BIL, $88 billion in new EV manufacturing investments (including batteries) have been announced by automakers presumably seeking to capitalize on this historically fertile investment environment, as well as the vehicle demand boost that will come from their compliance with the EV tax credit’s battery component and critical mineral requirements.
From our perspective, there’s still work to do. Onshoring EV manufacturing jobs doesn’t guarantee that they’ll be good jobs with community-supporting wages, benefits, and training opportunities, or union jobs. But making sure these jobs are located here in the United States is a necessary start.
Table: The BIL and Inflation Reduction Act together established and funded a range of manufacturing investment programs that will make meeting the final assembly, battery content, and critical mineral requirements of the updated clean vehicle credit possible.
|Advanced Technology Vehicle Manufacturing Program||$3B for direct loans to manufacturers to re-equip, expand, or establish facilities that produce clean vehicles (light-, medium-, or heavy-duty) and their components.|
|Domestic Manufacturing Conversion Grant Program||$2B in grants to support the domestic production of EVs, hybrids, plug-in hybrid electric vehicles (PHEV), and hydrogen fuel cell vehicles, especially in recently-closed or at-risk facilities.|
|45X Advanced Manufacturing Production Tax Credit||Est. $30B in production tax credits for manufacturing solar, wind, and battery components and processing critical minerals including aluminum, cobalt, lithium, nickel, and more.|
|48C Advanced Manufacturing Tax Credit||$10B in investment tax credits for establishing or retooling a factory to produce a wide range of clean technologies, including renewable energy technology and EV components.|
|Battery Manufacturing & Recycling and Materials Processing Grants||$6B in competitive grants spread across two grant programs: one that funds the demonstration, construction, and retooling of battery material processing techniques and facilities, and one targeting battery manufacturing and recycling.|