Fixing the Inflation Reduction Act’s Electric Vehicle Pile-Up

The solution is more supply-side policy

Democrats in Congress are on the verge of taking historic action to combat climate change. The clean-energy spending provisions in the Inflation Reduction Act passed by the Senate would do the lion’s share of getting the United States within striking distance of its emissions reduction goals. As many have said, that’s a really big deal.

There is at least one kink in the bill, however. Conditions imposed on tax credit subsidies for electric vehicles at Senator Joe Manchin’s behest threaten to make those credits virtually useless. Manchin has insisted on tying tax credits for EVs to a domestic mineral supply chain that doesn’t exist yet and won’t exist on the timeline he’s specified.

That’s a problem, but there’s still time for Democrats to fix it by relying on smart supply-side progressive policy.

The EV Problem

Joe Manchin was always a bit of an EV skeptic. As I wrote in June, he had voiced several objections to pumping more subsidies into the EV market. His basic objections seemed to center around (1) not wanting to subsidize demand in an EV market currently constrained by supply, and (2) not wanting to indirectly subsidize Chinese producers that control most of the EV battery market.

In the interest of striking a deal, I suggested Senate Democrats pursue a supply-side alternative to the EV tax credit. In particular, I encouraged policy to shore up the supply of the critical minerals needed in EV batteries through financial incentives for mining, permitting reform, and R&D. “At bottom,” I wrote, “we need to achieve EV abundance by securing battery abundance.”

Instead, Manchin and the EV boosters within the Democratic caucus struck a different deal. Instead of replacing the EV tax credits altogether, the Inflation Reduction Act struck a compromise that kept $7,500 in EV credits, but limited them to vehicles whose batteries and other components are sourced from minerals mined or manufactured in North America (or other countries where the U.S. has a free trade agreement). The bill requires that at least 40 percent of a vehicle’s critical minerals are sourced from North America and US free trade partners — and that amount ratchets up to 80 percent by 2027. Similarly, the bill requires that at least 50 percent of an EV’s battery components are sourced from North America/free trade partners, ratcheting up to 100 percent by 2029.

But as Jael Holzman of E&E News pointed out, there’s a problem: “The EV supply chain required for the tax credit doesn’t exist.” That’s because the critical minerals required for EVs and batteries — lithium, cobalt, graphite, and nickel — and predominantly mined in manufactured in China, Russia, Indonesia, the Democratic Republic of Congo, and other countries without a U.S. free trade agreement. That means vehicles using materials sourced from those countries — currently most of the EV market — would be ineligible for the IRA’s tax credits.

Shortly after the IRA’s draft text was released, automakers began sounding the alarm about the problems with the EV credit conditions. They projected that 70 percent of existing EV models would not qualify for the IRA’s tax credits. And the Congressional Budget Office estimated that only 11,000 vehicles per year would quality for the EV credits.

We Could Have Had Good Supply-Side Policy

In a follow-up article, Holzman detailed the inside talks that led to the Manchin compromise on EVs. In short, a group of Democratic Senators was in fact trying to win Manchin over with supply-side policy to support domestic mining and battery production. But Manchin evidently insisted on imposing onerous conditions on the tax credits themselves. Here’s Holzman:

As Schumer and Manchin went back and forth over the climate bill, other Senate Democrats had their own proposal to help create an American battery supply chain that could take on China.

For a long time, according to two people familiar with the talks, Stabenow worked with Sens. Michael Bennet (D-Colo.), Raphael Warnock (D-Ga.) and Catherine Cortez Masto (D-Nev.) to craft a package of supply chain incentives with some of the brightest minds in the battery and critical minerals sectors, including academics and industry representatives.

One of those experts was Nathan Iyer, a senior associate with the Rocky Mountain Institute, a think tank focused on developing climate policy solutions.

The four senators, said Iyer, developed a tax credit package for battery and mineral production that would have helped subsidize a supply chain compatible with a cheaper and more secure U.S. electric vehicle market.

The tax credits for battery production wound up in the bill. But on mining, Manchin had his own demand for binding mineral content requirements, which Iyer said were “required for him to support the EV tax credits” at all.

Manchin’s policy intent was clearly to impose a strict firewall on the EV credits to keep them from redounding to China’s benefit — and in turn to create an incentive structure to shift the EV supply chain back home (or at least toward friendlier territory). But his approach feels a bit like throwing the EV baby out with the bath water: by being so stringent about avoiding any supposed Chinese giveaways, the Manchin compromise may render the EV credits unattainable.

To my mind, the approach Senators Bennet et al were reportedly pursuing would be a better course. Supply chain incentives and tax credits to encourage domestic mineral production would be more effective industrial policy to support battery production at home without undercutting the EV market.

Holzman also reports that “Manchin’s office had ‘been asking automakers for a really long time to give them’ data on ‘what a reasonable on-ramp’ would be for creating a domestic EV supply chain.” It appears that automakers never took this prospect seriously enough to give Manchin a useful answer — and so Manchin answered for them: two years. That now seems like quite a mistake.

Ways Out of This Jam

Democrats should really try to fix this EV credit snafu. Yes, they have to step gingerly around Manchin before he changes his mind about all of this. But the problematic structure of the EV credit conditions feels like the kind of thing that was quickly thrown in the bill just to make him happy without much thought of whether it was sensible policy.

It’s also a flaw that could inflict collateral damage on other clean energy provisions. As Rewiring America’s Saul Griffith has shown, the household savings from rooftop solar panels really start to rack up when that household has purchased an EV that can charge off of the electricity generated from those panels. If buyers can’t utilize the EV credits, it will in turn weaken the financial incentive for them to spring for rooftop solar or otherwise electrify their homes.

So what can be done to clean up the EV credits at this juncture? Here are a few ideas:

• Slide back the operative dates for the sourcing requirements. If we want to create a domestic battery supply chain, that’s fine — but we’ll need more lead time to stand up that industry. The House could adjust the date when the sourcing requirements take plan, and/or the percentage of an EV’s materials that must be domestically sourced. For example, they could drop the unrealistic pre-2024 requirements for minerals and components, and make those thresholds kick in starting in 2026. This could also be done in conference committee after the bill has passed both chambers. Since Manchin evidently solicited automakers’ opinions on what a reasonable on-ramp would look like for domestic sourcing, adopting a more reasonable effective date that allows a realistic amount of time to stand up a domestic mineral and battery supply chain shouldn’t torpedo the deal.
• Restore the Bennet-Warnock tax credit for minerals. The House could in theory add this back in to create financial incentives to create and expedite a domestic lithium mining industry. For example, California’s Salton Sea could eventually meet as much as 40 percent of the world’s lithium demand — but it won’t start to produce lithium until at least 2024. Tax credits could help speed that up and ramp up production sooner.
• Give the Treasury Department discretion to adapt the domestic sourcing conditions. Treasury is charged with monitoring the sourcing of EV materials under the IRA. Conceivably the EV credits could be retooled to grant Treasury some discretion to determine whether automakers have utilized a reasonable amount of domestically-sourced materials and components, or to grant waivers. In fact, agencies may already have authority to grant waivers like they have for other “Buy American” provisions.
• Include mining in permitting reform. Regulatory and permitting obstacles have also prevent more lithium mines from opening up in the U.S. Manchin won a permitting reform sidecar to accompany the IRA. This sidecar could be expanded to include measures that streamline permitting for mining development for critical minerals essential to the EV supply chain.

Democratic Senators understandably don’t want to rock the houseboat with Manchin by renegotiating much in this deal. As the Rocky Mountain Institute’s Nathan Iyer said, it’s “such a sensitive time that no one wants to be ‘that guy.’” Now that the IRA has passed the Senate, it’s time for some House Democrats to stand up and be “that guy” for the sake of good EV policy.