New Clean Vehicle Credit Trades Short-Term Pain for Long-Term Gain

On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act (IRA) of 2022, designed to help Americans that are struggling with rising costs. However, the law also includes nearly $370 billion in incentives for clean energy and climate-related programs and is considered one of the most significant spending packages in history for climate change mitigation and adaptation. This blog is part of a series whereby Guidehouse Insights’ subject matter experts cut through the 755 pages of legislation to identify the IRA’s most significant elements and synthesize what they really mean for the future of clean energy technologies.

For more than a decade, American new car buyers interested in going electric, and the companies manufacturing these vehicles, have been the beneficiaries of a combination of tax incentives at both the state and federal levels. However, the IRA has completely upended the federal program in ways that are likely to be less advantageous in the near term while incentivizing a more resilient supply chain in the medium to long term. 

The original federal plug-in EV (PEV) credit program that has been in place since 2009 was fairly straightforward. Purchasers of a new PEV with a battery larger than 4 kWh or a fuel cell vehicle (FCV) could claim a credit of up to $7,500 on the next year’s federal tax return. Once a manufacturer had sold 200,000 PEVs, eligibility for the credits would begin a 12-month phase out. Tesla and General Motors (GM) PEVs have not been eligible for credits since 2019. 

The revised program, renamed as the clean vehicle credit (CVC), is significantly more complicated and, for now, most of the vehicles that had been eligible for the old program no longer are. The CVC is a scaled back version of the proposal of what had been included in the Build Back Better Act, which would have increased the credits to as much as $12,500 for PEVs built in US plants by a unionized workforce. 

The CVC maximum remains at $7,500, and although the union component is gone, only PEVs or FCVs built in North America are eligible. That means popular new PEVs like the Hyundai Ioniq 5 and Kia EV6 as well as plug-in hybrids such as the Toyota Rav4 Prime are no longer eligible. From January 1, 2023, the 200,000 sales cap is eliminated, which would in theory make GM, Tesla, and other manufacturers eligible again. 
Other key changes are the vehicle price and income caps. Cars with a sticker price of more than $55,000 and SUVs and trucks priced over $80,000 are ineligible, meaning most of the vehicles produced by US-based startups Rivian and Lucid are excluded, as are the Tesla Model S and X and extended range versions of the Ford F-150 Lightning. Single tax filers with more than $150,000 in income and joint filers with more than $300,000 are also ineligible for the tax credit.

Starting January 1, 2023, content requirements for the batteries and critical minerals such as lithium, nickel, and cobalt also go into effect. Instead of a single $7,500 incentive, there are now two $3,750 credits, each based on achieving one of the content requirements for battery components and for minerals. The requirements start at 40% in 2023 and increase by 10% annually to 80% in 2027. To qualify, the battery components or minerals must be produced either in North America or a country that has a free trade agreement with the US. Anything from China, where most lithium is currently processed, is disqualified. 

Until manufacturers begin publishing the sources of their battery materials and components, it will be impossible to say exactly how many vehicles will be eligible for the CVC, but it will likely be only a handful to start with. 

The new rules are already beginning to have an effect. Hyundai is accelerating plans for a new PEV/battery plant that was scheduled to open in 2025, pulling it forward into 2024. Shifting mineral processing out of China is also expected to accelerate over the next several years. By the end of the decade, localization of battery and mineral production should help reduce costs and significantly cut emissions related to global logistics. 

For more information on how Guidehouse Insights can help you navigate the impacts of the IRA, please reach out to richelle.elberg@guidehouse.com.