The Inflation Reduction Act (IRA) of 2022 is a climate bill that has major implications for the future of clean energy transition and greenhouse gas emissions in the United States. As a result, it will significantly impact future EV and battery manufacturing capacity, and the requirements will shape where these goods are produced.
Even though the legislation has passed, certain essential details haven’t been announced, and some of the rules have not taken effect yet. Also, because some of the requirements are a bit complex, many still struggle to understand the implications.
Here are a few of the highlights related to the EV tax credits:
The $7,500 EV tax credit will remain in effect until 2032, but there are some new requirements related to where the EV and battery are manufactured.
EVs made by General Motors and Tesla once again qualify for the tax credit because the legislation lifted the 200,000 unit per manufacturer sales cap.
More plug-in hybrid electric vehicles (PHEVs) are eligible for the $7,500 tax credit, even though they have both electric motors and internal combustion engines.
Used EVs will soon be eligible for a tax credit of up to $4,000 or 30% of the vehicle cost, whichever is less.
There are income caps and limits on the price of EVs that are eligible for the tax credit.
The IRA also has requirements for where EVs and EV batteries are manufactured and where critical battery minerals are sourced. As a result, several automakers have recently announced billions in investments in domestic EV and battery manufacturing. Among the heavy hitters are Tesla, Honda, Toyota, and General Motors.
What Are The New Requirements For EV Manufacturing?
The Act now requires that the final assembly of EVs be in North America to take advantage of the tax credit, which had not previously been a requirement. Currently, vehicles from Kia, Polestar, Genesis, Jaguar, Honda, and Land Rover are not built in North America, so they do not qualify for the federal EV tax credit.
To simplify things, the Department of Energy’s Alternative Fuels Data Center released a list of EVs that likely meet the new North American manufacturing requirements. Some of the electric cars on the list include the BMW 330e, Chevy Bolt, Lucid Air, Nissan Leaf, and Volvo S60 Recharge. Still, the location where automakers manufacture vehicles can vary even within the same model. Therefore, it is helpful to use a VIN decoder to confirm the assembly location.
However, beginning January 1, 2024, there are also requirements for the production of EV batteries that did not previously exist. In 2024, 50% of the component parts must be produced or manufactured in the U.S. or one of 20 countries with a free trade agreement with the U.S.
This requirement will increase by 10% annually through 2029 until it reaches 100%. In addition, a certain percentage of the critical minerals in the EV battery need to be extracted or processed in the US or a country with a US free trade agreement, and this amount increases by 10% annually until 2027.
Some notable countries with existing US trade agreements include Australia, where many rare earth minerals are extracted, and South Korea, where there is a lot of battery production.
Effective in 2024, EVs must fulfill both the final assembly and the EV battery manufacturing requirements to qualify for the full $7,500 tax credit. If they meet one but not the other, the tax credit value drops by 50% to $3,750. However, 2024 is relatively soon, so industry leaders are scrambling to increase their battery manufacturing capacity in the US.
Why Push For US-Based Battery Manufacturing?
Currently, China produces three-quarters of EV battery packs, according to the International Energy Agency. China also processes most of the world’s lithium, cobalt, and graphite, which are crucial battery materials. However, these batteries will not meet the new requirements for the EV tax credits.
The IRA will undoubtedly prompt the automotive industry to shift more of its EV assembly and production facilities to the United States, Mexico, or Canada. In fact, there have already been numerous decisions related to onshoring manufacturing facilities. And in 2022, automakers announced $13 billion in investments in domestic EV manufacturing and $24 billion in EV batteries.
Lawmakers designed the IRA to help make the U.S. a key producer of clean energy products and goods. According to the White House, the new manufacturing requirements will help promote domestic energy security, strengthen national security, and create high-paying jobs.
Also, this increase in clean energy use will help slow climate change due to a decrease in greenhouse gas emissions. Ensuring more reliable EV and battery supply chains will help the U.S. reach greenhouse gas emission reduction targets.
One intention of the IRA is to speed up EV adoption in the U.S. while reducing reliance on foreign supply chains. The pandemic and certain political events have caused price volatility and supply chain shortages in recent years, negatively impacting the economy.
For example, a computer chip shortage caused many automakers to temporarily close factories, slowing the production of numerous car models. Likewise, skyrocketing oil prices have increased transportation costs and contributed to high inflation.
What Goes Into EV Batteries?
Most EVs, PHEVs, and electronics use rechargeable lithium-ion batteries, which have four basic battery components: the anode, cathode, electrolyte, and separator. There are different battery chemistries, and nickel manganese cobalt (NMC) and lithium iron phosphate (LFP) are the most commonly used EV battery chemistries.
The cathode contains various materials, including lithium, nickel, cobalt, and manganese; most anodes are graphite. Automakers have announced billions of dollars in investments into new production lines to manufacture EVs and batteries. However, ramping up the production of electric vehicle batteries will likely create shortages of key metals, which can create a spike in metal prices.
For example, from September 2021 to March 2022, the price of lithium increased by more than 400%, though it has since slowed down. Therefore, it is critical to establish a secure supply of lithium and other critical metals. Due to a spike in demand, hundreds of mines will need to open to keep up with metal supply demands. In addition, there are also plans to boost EV battery recycling capacity at the end of their life cycle to help reduce the need to mine virgin materials.
Where Can We Expect New Factories And Jobs?
EV tax credits will make eligible electric vehicles up to $7,500 less expensive, boosting demand. Thus, as many companies ramp up the production of EV batteries, they will also create green jobs.
The IRA will create an estimated 260,000 jobs from the EV and fuel cell tax credits, according to analysis from the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst. In addition, it will create 50,000 jobs for clean trucks and buses from grants and rebates.
Battery manufacturers, including LG Energy, SK Innovation, Panasonic, and Samsung, are investing billions in battery manufacturing, and there will likely be a battery belt taking shape in the Midwest. Many of these manufacturing jobs will be centered in Kentucky, Tennessee, Indiana, Michigan, Ohio, and other Midwest states.
Many automakers and battery manufacturers have recently announced plans to expand their production capacity.
Ford recently finalized a plan to bring its battery manufacturing to Kentucky and Tennessee.
General Motors and LG currently produce batteries in Ohio and announced plans for battery manufacturing in Michigan and Tennessee.
Stellantis (the owner of Ram and Jeep) announced a joint venture with Samsung to construct a new battery plant in Indiana.
Elon Musk, co-founder and CEO of Tesla, plans to achieve volume production of its 4680 battery cell by the end of 2022 at the Gigafactory in Texas.
The Clean Energy Transition Is Creating Green Jobs
The IRA will speed up the transition to clean energy while creating numerous jobs. New EV and battery manufacturing requirements will boost domestic manufacturing but have left automakers scrambling to onshore battery production. In addition, the electrification of transportation increases the demand for EV chargers, which will also create jobs. Understanding these opportunities will help clean energy professionals gain insights into a shifting market and how to capture career opportunities.