Senate passes $7,500 EV tax credit, requiring carmakers to stop using Chinese batteries

EV tax credit

The Senate just passed the Inflation Reduction Act of 2022 along party lines. As it heads to the House for what will likely be a simple pass, we examine the bill's limitless $7,500 EV tax credit. 

It will offer new EV purchasers more incentive to switch, but manufacturers will have to change their manufacturing plans and lessen their reliance on China's battery supply chain.

Tesla was ineligible for the $7,500 EV tax credit because it was capped at 200,000 vehicles per manufacturer. New law uncaps program. It also imposes new rules that will change how firms approach production.

To be qualified in 2024, a vehicle must be constructed in North America and its battery must contain at least 40% North American or US-sourced elements. By 2029, 100% of battery components will be recycled. China makes 76% of lithium-ion batteries nowadays.

The Verge reports that if the 2024 regulations were implemented immediately, no vehicle presently in production would qualify for the tax credit. 

John Bozzella, president and CEO of the Alliance of Automotive Innovation, said, "The $7500 credit may exist on paper, but no vehicles will qualify in the next several years." Manufacturers must move swiftly to keep their cars eligible.

Bozzella says in a blog post that 72 EV models are currently available in the U.S. 70% of EVs would be disqualified when the measure passes, and none would qualify for the entire credit when further sourcing restrictions take effect. Zero.”

This element of the bill is less about making batteries in North America and more about ensuring they're not created in China. South Korea, Singapore, Mexico, Australia, Bahrain are US commercial partners.

The battery components must be made by an American company, not simply anyplace. Tesla can't install batteries in Shanghai and get the credit. 

We expect the bill to benefit Tesla along with GM and Ford. Most major manufacturers are building new battery production facilities to meet 2024 regulations.