Does the New EV Tax Credit Do More Harm Than Good?

The hype surrounding electric vehicles (EVs) has increased over the past couple of decades, with EVs touted as some of the most environmentally friendly modes of transportation in a world facing dire climate change impacts.

Still, they’ve yet to take off across global markets as many hoped they would. According to a Pew Research Center survey, only 7% of Americans own an EV, despite several car manufacturers ramping up production in anticipation of an EV boom in the United States. Additionally, more than half of Americans believe EVs lack the reliability and accessible price tag to consider purchasing one in the future.

Consumers aren’t exactly wrong. The cost of EVs has been substantially higher than conventional vehicles. However, experts negate the argument with the long-term savings that offset the initial purchase price, such as reduced fuel and maintenance expenses.

In the U.S., at least some of the investment in owning an EV is subsidized through federal tax credits and leasing contracts for lithium-ion batteries. Other industry experts claim that a rise in EV sales and lower battery production costs will eventually drive an uptick in the market. Of course, for that to happen, domestic EV battery production also needs to ramp up.

Currently, China dominates the lithium-ion battery market, with 93 million “gigafactories” compared to the four factories headquartered in the U.S. China will further develop its EV battery production to 140 gigafactories by 2030, with the U.S boasting just 10 factories.

While efforts to broaden U.S. lithium-ion battery production are underway, the recent Inflation Reduction Act of 2022 might stall progress.

The new legislation seeks to expand EV tax credits to widen the current domestic market. However, the requirements that fall under the new provision are expected to do more harm than good for EVs sold in the U.S. today.

EVs in the United States Today

The latest market analysis report by the Alliance for Automotive Innovation highlights the key takeaways of domestic EV ownership and operations. As of the first quarter of 2022, EVs accounted for 5.9% of total vehicle sales, with 79 EV models currently available in the U.S.

Growing interest in EV ownership comes at a time when consumer gas prices have reached an all-time high in the U.S. and Americans are spending more on everyday essentials thanks to a rise in inflation costs.

The U.S. Energy Information Administration (EIA) estimates that Americans used 135 billion gallons of gasoline in 2021 – about 91% of which was sold for light-duty vehicles such as cars and trucks.

Obviously, EVs – including hybrid electric vehicles (HEVs) – require less fuel than conventional cars. This makes them more appealing to consumers to reduce fuel costs and harmful emissions.

Take, for example, the Toyota Prius Prime hybrid EV, which can operate for 620 miles fully charged and with only one full tank of gas. While this is an impressive feat, the prevalence of public charging stations isn’t where it needs to be for more people to adopt EVs and benefit from their transportation capabilities.

Currently, manufacturers, automakers, various sustainability organizations, and governments are trying to increase the accessibility of charging stations across the country. As of 2022, there are more than 46,000 public EV charging stations and 115,000 privately owned charging ports in the U.S.

In comparison, approximately 115,000 gas stations exist in the U.S., a number continuously dropping as EV sales surge and society develops a greater awareness of the effect of harmful vehicle emissions on the environment. If the U.S. continues to experience more EV sales soon, gas stations are expected to become obsolete in many areas.

Depending on who you ask, this would carry several environmental benefits. For one thing, EVs produce zero tailpipe emissions and have a much longer life cycle. Even lithium-ion batteries can last between 10 and 20 years before they see a reduced power capacity.

While more can be done to reduce battery manufacturing emissions, the U.S. is positioned to pioneer new technologies for enhanced EV production – if only the recent EV tax credit allows domestic production to meet consumer demand.

EV Tax Credit to Hinder Sales in the U.S.

The EV tax credit under the new Inflation Reduction Act of 2022 aims to bolster a transition to widespread adoption of EVs. Yet, provisions on lithium-ion battery manufacturing could hinder sales and inventory availability if more people show interest in EV ownership.

Although the EV tax credit would lower the price of a new EV by $7,500, concerns are growing around the latest mandates for lithium-ion batteries and essential materials to be sourced and manufactured domestically or in countries that maintain free-trade agreements with the U.S.

For instance, 50% of EVs must be manufactured and sold in North America by 2023, reaching 100% by 2028. Additionally, by 2025, tax credit exclusions will apply to EVs whose batteries are manufactured by countries deemed a “foreign entity of concern” by the U.S. government, such as China.

There’s unlikely to be enough materials to increase battery manufacturing in the U.S., limiting EV sales. As the new rules stand, it’s possible that none of the EV models in the U.S. market would qualify for the EV tax credit.

Fortunately, vehicle manufacturers are responding as quickly as possible to increase domestic lithium-ion battery production.

In July 2022, LG Chem and General Motors Co. (GM) announced they would be working together to supply 950,000 tons of cathode active material – the primary component of lithium-ion batteries – through 2030, enough to power 5 million EVs.

Ford Motors and Korean battery manufacturer SK Innovation also invested $11.4 billion in an electric F-150 assembly plant and three U.S. battery production facilities for a 50% all-electric global volume by 2030.

This comes amid increasing demand for global EV production, from 3.4 million to 12.7 million between 2020 and 2024, resulting in a 25.5% higher need for lithium-ion batteries.

EV Tax Credit an Upward Battle for the Domestic Market

In a broader scope, the EV tax credit seems to encourage EV ownership. However, placing more restrictions on battery manufacturers to deliver the essential parts domestically will be challenging. Perhaps, in time, lithium-ion battery production will be more widespread domestically in the United States.