The Biden administration announced Friday that it will bar any electric vehicles from qualifying for subsidies if their batteries are made in China or with Chinese materials, a provision that extends to any companies worldwide that are under Beijing's sway.
The standard is aimed at shoring up domestic manufacturing and moving the supply chain for electric vehicles away from China.
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It means fewer cars will be eligible for the $7,500 consumer tax credit included in the Inflation Reduction Act, which could threaten Biden's ambitious goals, which are for electric vehicles to make up 50% of all car sales by 2030.
China dominates the EV battery supply chain and is responsible for more than 74% of cathode production, more than 90% of anode production, and roughly 75% of lithium-ion battery cell production.
Senior administration officials acknowledged that the new rules are rigorous but said that it views them as “strict but achievable."
They also touted recent EV sales rates in the United States, noting that electric vehicles now represent 10% of all new vehicles sold.
“That’s not to say there won’t be bumps in the road in terms of the EV transition,” Energy Department Deputy Secretary David Turk told reporters. “But our data and the numbers that we're looking at show an overall strong momentum on the front-end consumer interest in EVs.”
There are three main components of the new guidance relating to "foreign entities of concern." For the manufacture of batteries, they go into effect in 2024. For the sourcing of critical minerals used in batteries, they will go into effect in 2025.
The first is a restriction related to an entity that is either incorporated in, headquartered in, or performing the relevant activities in a "covered nation," which includes China as well as Russia, North Korea, and Iran.
The second applies to any entity that has at least 25% voting interests, board seats, or equity interests held either directly or indirectly by the government of a covered nation, regardless of where the activities occur.
The third provision applies to companies operating outside a covered nation under a contract or licensing arrangements from a covered nation and who fail to obtain certain rights for their vehicles to qualify for the 30D requirement.
This "foreign entity of concern" definition affects not only eligibility for the tax credits under the Inflation Reduction Act but also eligibility for the processing and manufacturing grant program created by the 2021 Bipartisan Infrastructure Law.
It is unclear how the terms would apply to Ford’s partnership with Chinese battery company CATL. The U.S. automaker said earlier this year it would invest $3.5 billion to build a new EV battery plant in Michigan using the technology from CATL (an investment it scaled down slightly earlier this month amid concerns over sluggish demand).
The partnership has been heavily criticized by congressional Republicans, who have demanded to see copies of their licensing agreement amid concerns that it could be allowing money from the tax credits to flow to Chinese entities.
The guidance builds on existing tax credit requirements, including a battery component requirement that dictates that 60% or more of a battery be manufactured in North America beginning in 2024, an amount that gradually rises to 100% by 2029, and a separate critical mineral requirement dictates that at least 50% of critical minerals in an EV battery be sourced or processed in the U.S. or a country with a free trade agreement.
By 2027, that amount rises to 80%.
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The administration had been under pressure from Sen. Joe Manchin (D-WV) to adopt stricter standards for what electric vehicles are eligible for the credits.
Manchin had brokered a deal with Senate Majority Leader Charles Schumer to pass the Inflation Reduction Act. Following its passage, though, he has blasted the administration as interpreting its provisions to favor the quick adoption of green technologies rather than promoting energy security and domestic production, as he had intended.