Details of Critical Minerals, Battery Rules Released; Ban on China Details to Come

Starting April 18, consumers buying electric cars and trucks manufactured in North America that do not have enough friend-shored critical minerals or North American battery components no longer will qualify for a $7,500 tax credit.

In guidance released March 31, the Treasury Department confirmed that critical minerals processed in Japan will count for the credit, and the administration said if other countries sign critical mineral deals like the one with Japan, they will qualify, too.

For the vehicle battery's content requirements, 50% of the "incremental value" of the cathode electrode, anode electrode, solid metal electrode, separator, liquid electrolyte, solid state electrolyte, battery and cells, must come from North American assembly. The guidance says: "The total incremental value of battery components could also be calculated by totaling the value of each battery module in the battery."

Dan Ujczo, a trade attorney with auto industry expertise at Thompson Hine, said the biggest winners as a result of the Inflation Reduction Act EV regulations "are the technology companies doing traceability of supply chains" with regard to the critical minerals content requirements. Currently, processors commingle minerals from a number of sources. That will have to end for companies' vehicles to qualify for the full tax credit in coming years.

"On the battery side, the biggest winners are the valuation experts out in the world," he said in a phone interview. "Keep in mind that incremental value is not the same as value added. Those are precise terms under IRS regulations, which is a little bit different than what we’re used to seeing in customs land."

Although the administration is asking for comments for 60 days, starting on April 17, including on how to expand the list of countries eligible for critical minerals benefits and on "the distinction between processing of applicable critical minerals and manufacturing and assembly of battery components, and related definitions," the restrictions on the tax credit based on battery and critical mineral inputs begin when the proposed rule is published, not when the rule is final.

Although automakers have to cut China out of battery component supply chains by 2024 and out of critical minerals supply chains by 2025 to preserve the credit (see 2208040045), Treasury postponed detailing what would count as a "foreign entity of concern," or whether there would be any de minimis exception to the restriction.

That delay drew the ire of members of Congress. Senate Finance Committee ranking member Mike Crapo, R-Idaho, said, "The ever-changing, and late, Treasury guidance on electric vehicle tax credits has once again failed to follow through on promises that minerals and components sourced from China would be barred from electric vehicles qualifying for the tax credit.”

Sen. Joe Manchin, D-W.Va., who insisted on language that would end U.S. dependency on China for green energy transition goods, issued a statement that said, "It is horrific that the Administration continues to ignore the purpose of the law which is to bring manufacturing back to America and ensure we have reliable and secure supply chains. American tax dollars should not be used to support manufacturing jobs overseas. It is a pathetic excuse to spend more taxpayer dollars as quickly as possible and further cedes control to the Chinese Communist Party in the process."

Before April 18, 25 cars and trucks qualify for either the electric vehicle or the smaller plug-in hybrid benefits because they are made in the U.S. or Mexico, and because their price tags are below the cap. How many will qualify after the proposed rule is published is unclear, but Tesla wrote on its website March 31 that consumers should buy Model 3 cars now, as they won't qualify for the break after that date.

Given how expensive EVs are now, and the fact that about three-quarters of the EVs sold in 2022 did not qualify for credits because the old system pushed makers off the list once they'd sold enough EVs, it's not clear how much the market will change if few cars qualify for the full $7,500, or if consumers will flock to cars that do, rather than those that only qualify for $3,750, or don't qualify at all.

Another unknown is how the fact that EVs from around the world get tax benefits if dealerships buy them to lease them out will affect pricing of leases, and if that will cause a shift in consumer behavior.

"The affordability issue’s one of the greatest challenges," Ujczo said, given that many EVs cost about $50,000.

For the rest of 2023 and for cars sold in 2024, manufacturers will need to certify that the critical minerals that qualify for the credit do so because 50% of the value added of those processed or raw minerals was done in a qualifying country, such as Japan, Chile, Canada, Australia or the U.S. In other words, the 40% value can be met without all of the sourcing coming from those allied countries or the U.S.

The guidance says: "Constituent materials could include, but would not be limited to, powders of cathode active materials, powders of anode active materials, foils, metals for solid electrodes, binders, electrolyte salts, and electrolyte additives, as required for a battery cell. Constituent materials would be the final products relevant for calculating the value of the applicable critical minerals in the battery."

Treasury said in later years it expects the government will move "to a more stringent test for determining if an applicable critical mineral was extracted or processed in the United States or in any country with which the United States has a free trade agreement in effect, or whether an applicable critical mineral was recycled in North America." That's because in order to make sure there's no foreign entity of concern involvement, buyers will have to be able to trace minerals back to the mine.

Because the overwhelming majority of the value added is in the processing, where the minerals are mined will be less important than where they are processed, under the initial standard.

Ujczo said, given how many battery plants and battery component plants are opening in the U.S. in the next few years, he thinks that development may provide political cover for the administration to loosen the critical minerals requirement down the road, if no one can meet the ever-increasing standards.

But as it stands today, he said, he thinks "the political narrative" that Treasury is being soft in its interpretation "doesn't match the practical reality.

"I don’t read these regs this way. This is the strictest standards of any supply chain around the globe."

Ujczo said automakers gain clarity with the battery regs, because there is now a clear definition of what a battery is, unlike in customs law.

"The takeaway, though, and I think it’s one that was highly expected -- you can’t just assemble cells and think it’s going to count as an electric battery."

Members of the House Ways and Means Committee from both parties continued to complain about Congress being cut out of decision-making in extending mini-deals on critical minerals to allies, so that their critical minerals can count toward the credit.

Trade Subcommittee Chairman Adrian Smith, R-Neb., said: "Treasury’s proposed EV rule is another example of the Biden administration ignoring the law when the plain facts don’t suit their agenda. I’ve said it before and I’ll say it again so there is no confusion: Congress will not, under any circumstance, forfeit our constitutionally mandated oversight responsibly of all trade matters. The administration should expect to answer to a bipartisan coalition of members who share this concern. This is unacceptable and unconstitutional, and I intend to use every tool at my disposal to stop this blatant executive overreach."

There are domestic voices who support the broader approach to FTAs, however. SAFE, a non-partisan energy security organization, on March 31 said that while there will need to be vigilance to make sure China is not in the supply network for EV batteries, "ultimately, it’s imperative that we expand the circle of allies and partners who can benefit from and contribute to our supply chains -- this includes the agreement just reached earlier this week with Japan."