EV makers get two-year reprieve on tax-credit restrictions

EV tax credits were expanded in 2022 as part of the Inflation Reduction Act. PHOTO: JUSTIN SULLIVAN/GETTY IMAGES
EV tax credits were expanded in 2022 as part of the Inflation Reduction Act. PHOTO: JUSTIN SULLIVAN/GETTY IMAGES


The Treasury Department has extended eligibility for cars containing Chinese graphite through 2026.

The Biden administration softened its proposed limits on tax credits for electric vehicles, letting consumers get up to $7,500 for cars containing Chinese graphite through 2026.

That is a two-year extension before some of the most stringent supply-chain requirements kick in. The reprieve gives car manufacturers an easier than expected path to make and sell vehicles eligible for the full tax credit.

The Treasury Department made the change Friday as it published final rules governing the tax credits, which are designed to encourage EV production and push supply chains for minerals and batteries into the U.S.

“These actions provide certainty and clarity to a marketplace that’s already growing rapidly," said John Podesta, the White House clean-energy adviser.

Congress expanded EV tax credits in the 2022 law known as the Inflation Reduction Act, aiming to spur rapid electrification of the passenger-automobile fleet. Those benefits came with a catch, including a series of escalating requirements that the vehicles exclude critical minerals and other materials from some foreign countries, including China.

Like other IRA incentives, the EV tax credits are serving several goals simultaneously, and sometimes work at cross-purposes. Tighter battery-content limits can help spur domestic industry, but they also will slow EV adoption.

The graphite restriction was set to take effect in 2025, and because most graphite comes from China, the number of EVs eligible for the tax credit was expected to plummet.

After industry officials objected, the Treasury Department relented. The government determined that it was too difficult to trace the origin of graphite, particularly because natural graphite is often mixed with synthetic graphite made from petroleum coke, which itself is hard to track. Other low-value materials, including minerals contained in electrolyte salts and electrode binders, get similar treatment.

To qualify for the two-year extension, automakers must show the government how they are beginning to reorient supply chains and document the origins of their graphite. And given how long it can take to reshape manufacturing processes, companies might start moving quickly to find more graphite sources outside China so they have EVs eligible for the tax credit in early 2027.

The Alliance for Automotive Innovation, which represents major automakers, said it recommended the changes, which it said should give car companies more time to develop domestic supply lines.

“The Treasury rules appear to recognize the realities of the global supply chain by providing some temporary flexibility in terms of where the critical minerals in EV batteries can be sourced," it said.

But the group called the tax credit “still hard to get," adding that only 22 of 122 EV models on sale in the U.S. qualify for part or all of the $7,500.

To get their EVs to qualify, automakers have been adjusting their supply chains for batteries and minerals, which have long been heavily dependent on China.

Car companies and their joint-venture partners are collectively spending tens of billions of dollars to construct battery factories in the U.S., including some that are already producing battery cells. That has allowed the companies to qualify some models for a portion of the tax credit that requires that EVs contain batteries made in North America, a threshold that kicked in this year.

“This final rule supports American battery manufacturers going forward," said Deputy Energy Secretary David Turk.

The mineral rules are considered a heavier lift, because most of the core raw materials, such as lithium, nickel, graphite and manganese, are either extracted or processed in China.

The rolling phase-in of the rules has scrambled the landscape for EV tax credits, with some models falling in and out of eligibility as new rules take effect. The battery requirements that began in January rendered several models ineligible because certain components were sourced from outside North America.

General Motors, for example, said it built about 20,000 EVs—including the Chevrolet Blazer and Cadillac Lyriq SUVs—that didn’t qualify because of the battery rules. In March, the company said it had adjusted its supply to regain eligibility for those models.

Many of the rules released Friday by the administration differ little from earlier proposals. They specify how much government ownership and control in places such as China tips a supplier into being a “foreign entity of concern."

They detail how consumers can claim the credits when they purchase new and used cars from dealers rather than waiting to get them on their tax returns. So far this year, more than 100,000 credits worth more than $700 million have been claimed at the point of sale, according to the Treasury Department.

Write to Richard Rubin at richard.rubin@wsj.com and Mike Colias at mike.colias@wsj.com

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