We’ve blogged before about the requirements for the EV tax credit contained in the Inflation Reduction Act (IRA). While the IRS has made some moves to make the credit more accessible – such as eliminating the previous 200,000-unit-per-manufacturer sales cap – the Treasury Department proposed rules that will seriously further limit the number of qualifying vehicles. Billing the rule as continuing the “US Manufacturing Boom in Batteries and Clean Vehicles”, Treasury announced new Foreign Entity of Concern (FEOC) rules as part of a larger rulemaking for Section 30D.
The proposed rule states that:
“A battery cell, with respect to a new clean vehicle placed in service after December 31, 2023, and before January 1, 2025, is FEOC-compliant if it is not manufactured or assembled by a FEOC and it contains only FEOC-compliant battery components…”
Beginning in 2024, the FEOC requirement applies to critical minerals – although a two year exception is made for non-traceable battery materials. According to a proposed rule by the Department of Energy, China is one such FEOC. This means that once the rule is finalized, no vehicles with Chinese batteries or batteries with components of Chinese origins will qualify for the EV tax credit. As things stand now, only about 20 out of 103 EVs for sale in the U.S. qualify for the tax credit, and with the new DoE FEOC rules coming into effect it is unclear how much further that list will shrink.
This ban on FEOC components was present in the IRA, but is only now coming into effect as agencies finalize the rules surrounding the EV tax credit. China has one of the most developed battery supply chains in the world. The US is working to scale up battery manufacturing capacity in a way that will keep the EV tax credit meaningful, but that won’t happen overnight. Anyone looking to take advantage of the tax credit on a personal level – or companies that are counting on the tax credit to meaningfully increase EV uptake as part of their climate risk assumptions – should take action now or pay close attention to what happens with the Treasury proposal.
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