It's about to become harder to get a tax break for an electric car

The Biden administration is preparing to announce its most pivotal action to date in carrying out the president’s climate law — setting the rules for determining which kinds of electric cars and trucks can qualify for its $7,500 tax credits.

The outcome will have huge implications for the fight against climate change, trade friction with Europe, and President Joe Biden’s ability to wage a reelection campaign boasting that he created American clean-energy jobs while making electric vehicles less expensive for consumers.

Industries including auto manufacturing and mining also have billions of dollars at stake in the policy document that the Treasury Department is due to issue by Friday.

The Treasury guidance will address one of the fundamental questions underlying Biden’s climate policy — how zealously to enforce Congress’ demand that the tax credit go to vehicles made with parts and minerals from the United States and its closest trade partners. A lax approach to that mandate would make it easier for more vehicles to qualify for the full tax break, while assuaging European demands for a share of the incentives for their companies. But it wouldn’t create the homegrown clean-energy supply chain that Biden has promised.

Some lawmakers — including Sen. Joe Manchin (D-W.Va.), who crafted the law’s content sourcing rules — say Biden is moving to allow too many of an electric vehicle's materials and components to be made outside North America.

“I think they’re going to try to screw me on this,” Manchin said Wednesday at a summit on electric-powered transportation. “And I'm willing to go to court.”

This is POLITICO’s guide to the upcoming announcement — and the most important issues to watch:

Automakers are bracing for bad news

Biden has set an ambitious target for a swift U.S. move to electric vehicles, calling for them to make up 50 percent of new U.S. car and truck sales by 2030.

But Manchin, who provided the crucial vote for Biden’s Inflation Reduction Act, ensured that the law lays out a slew of requirements for electric vehicles to receive the full tax credit. That will make it difficult for most vehicles now on the market to qualify, depending on how much wiggle room the administration offers.

The law’s intent was to ensure that the U.S. doesn’t wean itself off Saudi oil only to become hooked on Chinese battery minerals.

Among other requirements, the law mandates that a certain percentage of the components of an electric vehicle’s battery must be sourced from North America, and its minerals must come from the United States or a country with which the U.S. has a free-trade agreement. (Canada and Mexico have such deals, but the European Union does not.) No battery content can come from China. The vehicle itself needs to be built in the United States.

The car also can’t sell for more than $55,000 (or $80,000 for vans and SUVs). And wealthy buyers need not apply — there’s an income cap of $150,000 a year for individuals, or $300,000 for joint filers.

The restrictions will probably disappoint consumers who have been eager to ditch their gas guzzlers, and could slow the effort to reduce the nation’s largest source of greenhouse gas pollution.

They also create a predicament for automakers who are pouring huge amounts of money into producing more electric vehicles than ever — only to find that the tax credit that’s supposed to spur consumer demand might be largely unavailable. According to a Reuters analysis of 37 global automakers, the industry plans more than $1 trillion in electric vehicle investments by 2030.

Automakers were already preparing for continued uncertainty even after Treasury’s guidance comes out. For example, carmakers are still researching the origins of their own supply chains, and they may need more time before they can give Treasury a detailed accounting of the provenance of every piece of every vehicle.

On the other hand, Treasury indicated in December that it would give automakers a break on one arcane but crucial question — whether the metal powders inside a battery’s electrodes should be considered “critical minerals” or “battery components.” The department said it was open to classifying them as minerals, which increases the number of countries where the powders can come from.

What to watch: Automakers say they are playing the long game, hoping that consumers will realize that electric vehicles already compare favorably to gasoline-powered cars given their savings on fuel and maintenance, and will only become cheaper as more hit the market. The tax credit would help bring electric vehicles prices even closer to parity with traditional autos.

GM has said it thinks it’s “well-positioned” to take advantage of the tax credit “because we were already actively pursuing opportunities to localize as much of the supply chain as possible.” Some Tesla models could keep the tax credit because its vehicles and their batteries are built in the United States, and use minerals from countries that fit the IRA’s requirements.

No trade deal (yet) for Europe

European politicians — along with their automakers — have been incensed at the law’s domestic-content requirements, which have created a months-long rift in trade relations between the U.S. and its transatlantic allies..

Manchin has said he didn’t realize that the U.S. and EU don’t have a free trade agreement that would make it easier for minerals from Europe to meet the law’s domestic sourcing requirements. The administration has struggled with that gap ever since Biden signed the law in August.

This week’s Treasury guidance will not give Europe the relief it’s seeking, a senior administration official told POLITICO last week — but it will open the door to eventually including the continent in the law’s incentives.

The U.S. and EU are negotiating a mineral-specific trade pact that would give Europe the status of a free trade partner for the purposes of the climate law’s mineral sourcing provision. The U.S. and Japan signed a similar deal this week.

The vehicles themselves would still have to be built in the U.S. to qualify for the tax incentive. Critical minerals would also still be subject to tariffs, and the deal will probably contain commitments on labor and environmental sustainability.

What to watch: People following this issue closely say they don’t expect Treasury’s guidance to say anything explicitly about an EU trade pact. But European governments would be happy to see language alluding to possible future additions to the list of approved countries for mineral sourcing.

Mining industry needs a lifeline

The Inflation Reduction Act is a potentially powerful driver for mining companies — both domestically and globally — that provide the cobalt, nickel, lithium and other minerals that electric vehicles need.

China now dominates the global supply chain for those minerals.

U.S. mining companies have largely backed Manchin’s efforts to impose strict made-in-America requirements for batteries and other electric vehicle components. Relaxing those provisions, they warn, would deprive them of the customers they need to create the self-sustaining domestic industry that the climate law envisions.

The U.S. now has just one operating lithium mine in Nevada and a second, Thacker Pass, is ramping up after a lengthy legal battle. Other proposed mines around the country are facing objections from environmental groups and surrounding communities — and the uncertainty around the incentives creates another potential hurdle.

The U.S. is also launching efforts to secure minerals from other countries, such as those in Africa and South America, where it’s competing with China for influence. At the same time, Republicans and the U.S. mining sector argue that domestic mining offers a more secure source.

The European Union wants a piece of the action too. Earlier this month it unveiled a plan to ramp up domestic extraction and refining of raw minerals — mainly out of fear of China’s dominance.

More broadly, administration officials have been hinting that the U.S. can achieve its goal of reducing reliance on China by “friend-shoring” supply chains, not necessarily requiring all production to move to the U.S. immediately. That could also be good news for countries such as Chile and Australia, two of the top sources of lithium for electric vehicles.

What to watch: Treasury can’t change the critical mineral requirements tied to the tax credits, but hard rock miners are closely watching its language around what free trade agreements will be allowed and how that will affect domestic demand.

U.S. miners and unions are also watching how Treasury defines the “foreign entities of concern” that, starting in January, will not be allowed to provide any battery components for vehicles getting the tax breaks. The same rule kicks in for minerals the following year.

The miners’ and unions’ focus: Ensuring that nations such as Russia and China aren’t the ultimate sources of materials used to assemble EV batteries in other countries.

All eyes will be on Manchin — and other critics on the Hill

Treasury’s early decisions on the electric vehicle incentives have incensed Manchin, who went so far as to vote against Biden’s nominee to head the Internal Revenue Service over how the agency worked to implement the law. The senator has repeatedly made clear he sees the tax credits as a powerful tool for boosting U.S. manufacturing, not vehicles made overseas.

Much of Manchin’s ire has been directed at the IRS’ decision late last year to postpone some of the sourcing rules, while waiving the standards for some types of electric vehicles. Early this year, he unsuccessfully floated a bipartisan bill to stop the credit until the guidance and sourcing rules were in place.

He went even further at Wednesday’s electrification summit, accusing the administration of playing “games” and “catering to the far left” with an interpretation of the law that offers more flexibility to source parts from abroad. The White House, Manchin said, is “trying to implement a piece of legislation that they never passed.”

He said his concerns include the law’s definitions of terms such as “processing” and “manufacturing,” and how the administration intends to treat steps such as making powders and wafers for batteries.

On the other hand, Manchin said he supports the administration’s efforts to expand the list of countries from which automakers can source critical minerals — as long as those countries are “reliable trading partners.”

“Japan and all of them — the EU, our allies, they’re all reliable,” Manchin said.

But other lawmakers, including fellow Democrats, have blasted this week’s Japanese trade deal on minerals. That agreement is “unacceptable,” Senate Finance Chair Ron Wyden (D-Ore.) and Rep. Richard Neal (D-Mass.) said in a statement Tuesday, objecting to its absence of enforceable environmental or labor protections. And they said the administration “does not have the authority to unilaterally enter into free trade agreements” without working with Congress.

Similar objections could greet any similar trade deal with the EU.

What to watch: Manchin has said he’ll examine whether the guidance allows countries beyond those with formal free trade agreements with the U.S. to meet the critical mineral standards.

Will consumers lose patience?

Sales of electric vehicles have been soaring in recent years, amid high gas prices and hype from automakers and the government. That surge continued last year as consumers sought to take advantage of the $7,500-per-vehicle tax credit before the domestic sourcing rules took effect.

Now, consumers who want to use the tax credit to buy an electric vehicle will probably have to wait for some time, as Treasury sorts out what cars are eligible and automakers retool their supply chains to qualify.

Those who want the tax break right away might have to lease instead of buying. Under Treasury’s interpretation of the law, leased cars and trucks will fall into a loophole for "commercialized” electric vehicles, which will qualify for the incentives no matter how much they cost, what a consumer’s salary is, or where they were made.

It’s still unclear whether dealers will pass along the entire $7,500 tax credit to consumers over the course of a three-year lease.

The lack of tax credits doesn’t necessarily dampen consumer demand. In 2019, the federal tax credit for Teslas disappeared – but that didn’t stop Tesla sales from logging a 50 percent jump over 2018 sales that year. And they’ve just kept growing since, with 2022 sales numbers nearly four times the 2019 number.

But Tesla owners are wealthier than the average American — earning about twice the median income — and so might be less sensitive to the savings provided by the tax credit than other buyers.

What to watch: When Treasury released its interim guidance in December, it released a list of qualifying car models along with it, including the Ford Mustang Mach-E and the Nissan Leaf. But that might not be possible this time, so the landscape for buyers could temporarily get even more confusing.

What will this mean for the Earth?

The main aim of this legislation, of course, was to lessen the greenhouse gas pollution that is driving the warming of the planet.

Numerous studies have found that encouraging drivers to switch to electric vehicles needs to be part of any strategy for lowering carbon emissions. The National Academies, for one, has concluded that making a net-zero energy system reachable by 2050 would require half of all vehicles to be zero-emissions by 2030, powered by battery-electric or fuel cells.

But it’s unclear whether the Biden administration can simultaneously meet its goals of creating a domestic clean-energy supply chain while ensuring that electric vehicles are affordable and widely adopted.

That’s on top of the environmental challenges that mineral mining poses — and the potential for conflicts with communities in the U.S. who don’t want those projects in their backyards.

What to watch: Climate goals sync well with automakers’ goals in this case. Anything that helps the carmakers sell more electric vehicles helps advance Biden’s climate agenda.

Timothy Cama, Antonia Zimmermann and Zi-Ann Lum contributed to this report.