Back in January, we reported that the federal government was delaying the implementation of the complicated new battery and mineral requirements for the federal tax credit for electric cars, known as the Clean Vehicle Credit. Last week, the Treasury Department released the guidance we’ve all been waiting for. Here’s what you need to know about these upcoming changes to the federal tax credit.

What Are These Requirements?

The Inflation Reduction Act (IRA) created many new eligibility requirements for the federal Clean Vehicle Credit. You can read about all of them on our Rebates & Incentives page. Among those new requirements are two related to the manufacturing of electric vehicle (EV) batteries: 

1. Battery Components: A certain percentage of the value of battery components must be manufactured OR assembled in North America. (In 2023, it’s 50%.)
2. Battery Minerals: A certain percentage of the battery's minerals (by value) must be mined OR processed in North America, OR a country with a free trade agreement with the US OR recycled in the US. (In 2023, it’s 40%.) 

If a vehicle meets both requirements, it qualifies for the full federal tax credit ($7,500). If it meets one but not the other, it will qualify for just half ($3,750). The percentage requirement in each category ramps up over time.

What Did the Treasury Just Clarify?

The guideline document released by the Treasury is a draft of the final regulations that will be posted on April 17, 2023. (There is a public comment period open for the next 30 days, but the reports we’ve read do not expect the guidelines to change between now and then.) Effectively, the information released by the Treasury tells the auto manufacturers in more detail what the rules are and how to certify compliance.  

In particular, these guidelines define a key term in the IRA: “country with a free trade agreement.” Believe it or not, there is no single agreed-upon definition of that term in the IRA! So, the Treasury Department defined the term in such a way that allows new agreements negotiated specifically around critical minerals to qualify. Just a couple of days before these guidelines were released, the Biden administration announced a new such agreement with Japan; talks are underway with countries in the European Union for a similar agreement.  

What Does This Mean For Car Buyers?

The new guidelines from the Treasury will impact car buyers in the US in the short and long term. 

In the short term, the list of vehicles that are eligible for the Clean Vehicle Credit will shorten on April 18. We don’t yet know which vehicles will qualify for the full federal tax credit, just half of it, or nothing at all, but we do expect fewer vehicles to be eligible after these rules take effect. (The federal government will publish a list of eligible vehicles on April 18 and we will update our website then.) If you’re in the market for an EV and can get your hands on a car between now and then, we strongly recommend you go for it. But remember, the relevant date is the date you take possession of the vehicle, so if you order one now and get it after April 18, the new rules will be in effect. 

In the long term, expect more changes to the list. The list of eligible vehicles will continue to change in the coming months and years. As the US signs more critical agreements with more countries, the list of eligible vehicles may expand. But as the requirements ramp up from year to year, the list of eligible vehicles may shrink. In addition, in 2024, another requirement kicks in: at that point, to qualify for the federal tax credit, no battery components can come from a “foreign entity of concern.” Surprise, surprise, that’s another term without a clear definition, but it’s widely expected to include China, which is where nearly all EV-grade lithium refineries are currently located. 

The Chevrolet Bolt currently qualifies for the full $7,500 federal tax credit. Starting April 18, we don’t know what the federal tax credit for this EV will be, though General Motors CEO Mary Barra has indicated that she expects it to qualify for $3,750 moving forward.

One Potential Loophole: Leasing

The IRA, in addition to updating the federal tax credit for EVs, created a commercial EV tax credit for the first time as well. This new credit – and the fact that it’s available to tax-exempt entities via the Direct Pay provisions – is much needed, as it will help electrify the many fleets of light and medium/heavy-duty vehicles on our roads.  

However, the commercial EV tax credit presents an unexpected loophole: when a customer leases a vehicle, the manufacturer sells that vehicle to an affiliated dealership. The dealership can then claim the commercial EV tax credit (which does not have the same eligibility requirements as the Clean Vehicle Credit) and pass the value of the federal tax credit to the customer in the form of lower lease payments. We’ve heard whisperings of this loophole in EV-focused press in the past couple of months, but now the Washington Post and New York Times are reporting on it too. What does this mean for consumers? When the new battery requirements kick in, leasing certain EVs may suddenly get a whole lot more attractive than purchasing the same models. 

Confused? You’re Not Alone.

Frankly, all the complications and details of the Clean Vehicle Credit create a mess for consumers. The intent behind the IRA was to move the EV supply chain to the US and to its allies, and that is happening already in many different ways. But in the short term, the main impact we see on the ground is confusion and a lack of confidence for EV buyers, which is not ideal from a climate nor consumer perspective.  

We are hosting a webinar on April 27th to go through the new provisions of the federal tax credit and hopefully help clear up some of this confusion. We hope you can join us! In the meantime, if you have any questions, please email us at drivegreen@greenenergyconsumers.org. We’re here to help!