The Biden administration has put forward new rules intended to encourage more manufacturing of electric vehicle batteries and their components in the United States, aiming to reduce China’s dominance in the industry. The rules are designed to limit the involvement of Chinese companies in supplying materials for electric vehicles that qualify for federal tax credits. They are also meant to deter companies seeking federal funding to build battery factories in the U.S. from partnering with Chinese firms for materials.
These rules could impact automakers who heavily rely on China for materials and components for electric vehicles. The U.S. government aims to utilize new federal funding to establish a domestic supply chain for electric vehicles.
The climate law signed by President Biden in 2022 includes tax credits of up to $7,500 for consumers who purchase electric vehicles made in the U.S. using primarily domestic materials. The law also imposes a general ban on Chinese products. However, questions remain about the definition of a Chinese company, with the administration indicating that it includes any entity incorporated or headquartered in China, as well as any firm in which 25 percent of the board seats or equity interest are held by Chinese governments.
The law also mandates that battery makers entering contracts or licensing agreements with Chinese firms must ensure that they retain certain rights over their projects, aiming to prevent Chinese firms from effectively controlling such projects.
Some lawmakers had raised concerns about Ford Motor’s plans to license technology from the Chinese battery giant CATL for a plant in Michigan, arguing that such a partnership should not be eligible for federal tax credits.
The rules for battery components will take effect in 2024, while those for critical minerals like lithium, cobalt, and nickel will come into play in 2025. They will be open for public comment for several weeks and could be adjusted based on industry feedback.
These rules could have a significant impact on the U.S. electric vehicle market, which is rapidly expanding. Electric vehicles accounted for about 8 percent of new car sales in the third quarter. Car and battery makers are still assessing the 62 pages of rules released by the administration and determining how many models would qualify for tax credits.
John Bozzella, CEO of the Alliance for Automotive Innovation, stated that the rules struck “a pragmatic balance,” including exemptions for trace materials to ensure that some car models would still qualify for tax credits.
However, many vehicles have already been disqualified from purchase credits by other rules, like the requirement for cars to be assembled in North America. Currently, only about 20 out of more than 100 electric vehicles sold in the U.S. qualify for the program.
The rules also bring up questions about whether stricter supply chain requirements could lead to an increase in leasing, rather than purchasing, electric vehicles.
The restriction on sourcing from China only applies to vehicles that are sold, not those that are leased. This has contributed to a surge in E.V. leasing, as consumers can still receive tax credits for electric vehicles leased from auto dealers. However, concern about electric vehicle range and charger availability, more than price, is holding back electric vehicle sales.
Auto industry lobbyists have cautioned that extremely strict rules could hinder electric vehicle sales, advocating for more trade deals to secure supplies of scarce battery minerals. Nonetheless, General Motors’ CFO Paul Jacobson indicated that the company had structured its electric vehicle operations to succeed irrespective of federal rules.
The administration has stated that it will offer temporary exemptions through 2026 for the stringent sourcing requirements for less valuable battery components that automakers currently find difficult to trace.
Wally Adeyemo, the deputy secretary of the Treasury Department, noted that the rules would advance the administration’s goals of developing a U.S. clean energy supply chain while reducing emissions in the transportation sector. He added that automakers were making the necessary supply chain adjustments to ensure buyers are eligible for the tax credits.
Companies have poured $213 billion into clean energy, clean vehicle manufacturing, building electrification, and carbon management technology in the U.S. over the past year, a 37 percent increase from the previous year according to tracking by the Rhodium Group and the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology. There are also investments in factories and technologies to develop materials required for electric vehicle batteries and other components, including in North Carolina where several firms are trying to restart the lithium industry.
Despite this, the global electric vehicle industry remains heavily reliant on China, which is the largest producer and exporter of electric vehicles, battery cells, and key minerals for electric vehicle power. The dominance of China in critical mineral supply chains has raised concerns about potential disruptions to the supply of materials essential not only for cars but also for other applications such as jet engines and munitions.
The administration’s investments are aimed at reshaping this dynamic, with aims to prompt companies to set up mining, refinery, and battery-building operations in the U.S. and allied countries, subject to higher labor and environmental standards.
Jervois, an Australian mining company constructing the U.S.’ only cobalt mine in Idaho, paused construction in March due to a sharp drop in global cobalt prices, attributed to heavy subsidies for cobalt production by Chinese-owned companies. The company anticipates an impact from the Treasury Department rules but is awaiting further guidance from the government.
Battery makers in Japan and South Korea are also anticipating the impact of the rules due to their close integration with China’s supply chains. The rules also appear to bar automakers from sourcing nickel used in their batteries from Russia, one of the world’s largest nickel producers.
Automakers will face the challenge of developing systems to trace all components of their batteries through a complex and often opaque supply chain.
Todd Malan, the chief external affairs officer for Talon Metals, which is seeking approval for a nickel mine in Minnesota, highlighted that robust rules could help prevent “mineral laundering” schemes where Chinese or Russian minerals are routed through friendlier countries’ facilities. He emphasized the need for audits, clawbacks of awards for rule violations, and adoption of “know your supplier” systems to track inputs from mines through to recycling programs.
The Treasury Department stated that vehicles reported incorrectly would result in a subtraction from an automaker’s eligibility for tax credits, and companies found to have committed fraud or disregarded the rules could be declared ineligible for the credit in the future.
