1st December 2023 – (Washington) In a long-awaited move, the Biden administration has issued guidance that will impose restrictions on Chinese content in batteries eligible for electric vehicle (EV) tax credits starting next year.
The U.S. Treasury has granted a temporary exemption for certain trace critical minerals from the strict rules that bar materials from China and other countries designated as a “Foreign Entity of Concern” (FEOC), a decision that comes as a victory for automakers.
The new rules, mandated by a law passed in August 2022, aim to reduce the reliance of the U.S. electric vehicle battery supply chain on China. Automakers are closely monitoring these regulations as they make critical investment decisions regarding battery production for their transition to electric vehicles.
The FEOC rules will take effect in 2024 for completed batteries and in 2025 for the critical minerals used in their production.
The Alliance for Automotive Innovation, a group representing nearly all major automakers, has praised the temporary exemption of trace materials for two years, stating that this decision was significant and well-considered. Without this exemption, almost all vehicles could have become ineligible for tax credits.
The Treasury has clarified that the exempted materials account for less than 2% of the value of battery critical minerals.
Ford Motor had been awaiting this guidance to determine if its licensing agreement with Chinese battery maker CATL, as part of the automaker’s planned Michigan battery plant, would violate the new rules.
The Energy Department has specified that a company will be considered a FEOC if it is owned or controlled by a foreign government listed in the regulations. Additionally, companies will be ineligible if an entity of concern holds 25% of that company’s board seats, voting rights, or equity.
These countries include North Korea, China, Russia, and Iran.
The automaker group has noted that it appears companies operating in China are considered FEOCs. However, Chinese entities with specific ownership or governance structures may be permitted under certain circumstances.
The implementation of these rules is expected to further narrow down the number of electric vehicles eligible for EV tax credits. The law has already rendered any vehicle assembled outside of North America ineligible. Earlier this year, new battery and mineral sourcing requirements came into effect, accompanied by price and buyer income eligibility caps from January 1.
Senator Joe Manchin, Chair of the Energy Committee, had previously urged the Treasury to adopt the strictest possible standards. Manchin highlighted China’s dominant role in cathode and anode production, accounting for 74% and 92% respectively, as well as 76% of lithium-ion battery cell production worldwide.