The transportation sector constitutes the largest source of greenhouse gas emissions in the United States, and the Inflation Reduction Act (IRA) takes significant steps to transition the U.S. vehicle fleet to zero-emissions technology.  The proposed legislation takes a multi-faceted approach in doing so: it not only provides incentives for increased consumer use of electric vehicles, it also promotes domestic zero-emissions vehicle manufacturing. 

Most notably for consumers, the IRA provides clean vehicle tax credits of up to $7,500 for new vehicles, IRA § 13401, and up to $4,000 for used vehicles, § 13402.  It also eliminates a 200,000 vehicles per manufacturer cap, that was barring some companies—such as Tesla, Toyota, and General Motors—from benefiting fully from electric-vehicle tax incentives.  Id. § 13401. 

High-income earners are barred from claiming both credits.  For the new vehicles, the credit is limited to couples making less than $300,000, and individuals earning less than $150,000.  For used vehicles, the limits are $150,000 for couples and $75,000 for individuals.  The clean vehicle credit is limited by the actual retail price of the vehicle: it cannot be used to purchase vans, SUVs, or pick-up trucks retailing above $80,000 or any other vehicles retailing above $55,000.

The IRA also takes many steps to secure the American electric vehicle supply chain, and puts stringent eligibility limits based on where battery components are manufactured or the underlying critical minerals are processed or mined.  For instance, the Clean Vehicle Credits can only be redeemed when the new vehicles meet certain critical mineral requirements.  A percentage of the value of the critical minerals in the battery must be extracted or processed in countries with which the U.S. has either (1) a free trade agreement in effect, or (2) recycled in North America.  In 2023, this percentage starts at 40% and rises 10% each year until 2027 at which point the percentage will remain steady at 80%.  The IRA imposes similar requirements on battery components, allowing the Clean Vehicle Credit to be redeemed only when the percentage of the battery value of the components manufactured or assembled in North America meets a certain percentage, which starts at 50% in 2023, and increases 10% each year until reaching 100% in 2029.  The IRA also bars any application of the Clean Vehicle Credit to cars with battery components or critical minerals sourced from a “foreign entity of concern,” starting in 2024 and 2025 respectively. [1]

These restrictions are likely to prove problematic for critical minerals produced in China, and Sen. Manchin explicitly cited reducing dependence on Chinese critical mineral supply in his statement endorsing the Inflation Reduction Act.  Additionally, it marks another step in a slew of recent attempts by U.S. policymakers to discourage companies from making further investments in China, and to encourage domestic production at home.  For instance, late last year the House of Representatives passed the Uyghur Forced Labor Protection Act by an overwhelming 428-1 margin, which created a rebuttable presumption that goods made in whole or in part in Xinjiang are made using forced labor and are thereby prohibited from importation.  This law then passed by voice vote in the Senate.  More recently, and just before Senators Schumer and Manchin announced their agreement on the IRA, the Senate passed the Chips and Science Act by a bipartisan 64-33 margin, which was directly framed by some proponents as a measure to bolster the competiveness of U.S. semi-conductor manufacturing vis-à-vis China.  The IRA’s electric vehicle tax credit provisions add to this growing chorus of proposals by seeking to limit the exposure of American electric vehicle, battery, and mineral supply chains to China and other countries.

Recognizing the potential supply constraints caused by the battery and mineral sourcing limitations, the IRA also implements a variety of measures to promote domestic manufacturing of electric vehicles and battery supply chains.  For instance, the Advanced Energy Project Credit, which provides investment tax credits for projects that equip or expand manufacturing facilities producing specified renewable energy equipment, is revised and expanded to encompass electric and hybrid vehicles production.  IRA § 13501.  The base credit is 6%, but an increase 30% rate is available if prevailing wage and apprenticeship requirements are met.  Id.  Additionally, the IRA makes a $1 billion investment in clean heavy-duty vehicles, IRA § 60101, provides $2 billion in grants to retool existing auto manufacturing facilities to manufacture clean vehicles, § 50143, and expands the Department of Energy’s lending authorities under the Advanced Technology Vehicle Manufacturing (“ATVM”) program, § 50142.  In the past, the ATVM loan program has successfully catalyzed domestic electric vehicle production, most famously by supporting Tesla with a $465 million loan in January 2010.  Finally, the IRA takes steps to decarbonize the federal government’s own fleet of vehicles, providing up to $3 billion to electrify Postal Service delivery trucks.  IRA § 70002.

If enacted, these measures are sure to reshape and define the electric vehicle landscape.

[1] Foreign Entity of Concern, is defined by reference to the Bipartisan Infrastructure Law, 42 U.S.C. § 18741, and means: a foreign entity that is— (A) designated as a foreign terrorist organization by the Secretary of State under section 1189(a) of title 8; (B) included on the list of specially designated nationals and blocked persons maintained by the Office of Foreign Assets Control of the Department of the Treasury (commonly known as the “SDN list”); (C) owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation (as defined in section 2533c(d) [1] of title 10); (D) alleged by the Attorney General to have been involved in activities for which a conviction was obtained under— (i) chapter 37 of title 18 (commonly known as the “Espionage Act”); (ii) section 951 or 1030 of title 18; (iii) chapter 90 of title 18 (commonly known as the “Economic Espionage Act of 1996”); (iv) the Arms Export Control Act (22 U.S.C. 2751 et seq.); (v) section 224, 225, 226, 227, or 236 of the Atomic Energy Act of 1954 (42 U.S.C. 2274, 2275, 2276, 2277, and [2] 2284); (vi) the Export Control Reform Act of 2018 (50 U.S.C. 4801 et seq.); or (vii) the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.); or (E) determined by the Secretary, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States.

Martin Levy

Martin Levy is an associate in the firm’s Washington’s office. He is a member of the Environmental and Energy Regulatory practice, focusing on low-carbon and renewable energy incentives, carbon markets, environmental marketing claims, and other corporate climate change initiatives. He advises power generators…

Martin Levy is an associate in the firm’s Washington’s office. He is a member of the Environmental and Energy Regulatory practice, focusing on low-carbon and renewable energy incentives, carbon markets, environmental marketing claims, and other corporate climate change initiatives. He advises power generators, technology companies, and financial institutions on how to better align their business practices with “net zero” commitments. Before joining Covington, Martin was a vetting attorney with the Biden-Harris Presidential Transition, a law clerk at the Eastern District of New York, and an undergraduate environmental law instructor at Boston College.