Major Automakers, Battery Makers, Allies Weigh In on EV Tax Credit Regs

Numerous companies noted they had factory sites identified or under construction for battery manufacturing (or EV assembly), but that those would not be producing until 2025.

Treasury Secretary Janet Yellen, who had heard directly from countries whose automakers would be at a disadvantage because of the regionalization requirements, had expressed skepticism that she could ignore the statute's text on where batteries and vehicles could be made. But a number of companies and trade associations suggested a way she could be true to the language of the Inflation Reduction Act and still allow critical minerals processing to be done in Japan or the European Union -- by a broad definition of a "free trade agreement."

These commenters noted that if you consider all trade liberalization agreements listed in Note 3 of the Harmonized Tariff Schedule, that would include the EU and Japan, because the EU was a party to the plurilateral agreement on trade in pharmaceuticals; the U.S.-Japan trade agreement, colloquially known as the "mini-deal" reached during the Trump administration, is also listed in Note 3.

Honda wrote, "While the term 'free trade agreement' is commonly used in concert with a number of trade deals between the U.S. and other countries, there is no actual statutory definition of free trade agreement." SK On, a major battery maker from South Korea, suggested that any country that has a Trade and Investment Framework with the U.S. should count as a free trade agreement partner for the purposes of critical mineral processing or mining.

Quebec, however, which would benefit from a more restrictive list of countries that count for compliant critical minerals sourcing, said "executive agreements should not be considered as free-trade agreements."

In the last 169 comments received by the Treasury Department, and posted late Nov. 7 -- out of 821 in all -- many asked Treasury to clarify whether the "or" in extracted or processed means what they believe it does -- that lithium mined in Brazil or Argentina, but processed in Chile, would count for the tax credit, since Chile is an FTA partner.

Writing the guidance for the EV tax credits -- including the battery component and critical mineral requirements -- is a priority for the Treasury Department for the current plan year, which runs through June 30, 2023. But there is no timeline for when the guidance will be issued. The statute directs Treasury to issue guidance by the last day of 2022.

Tesla is the highest-volume EV seller in the U.S., even without current eligibility for tax credits because the old system phased out once a manufacturer sold enough EVs. (That limitation will lift on Jan. 1.) It said, "Treasury should ... provide guidance on the qualification of raw minerals that are not explicitly included within the law’s definition of critical minerals but are included in their refined form. For example, spodumene -- which is not listed -- is extracted and then processed to extract lithium -- which is listed."

Tesla, like many vehicle manufacturers, said the battery component methodology should stop at the cell level. "The geography of cell production is easily validated and provides a clear point of delineation to OEMs. Assessing the component requirement at a sub-cell level would be complex and likely prove unviable to enforce." This is also consistent with the USMCA auto rules of origin, it noted.

"Given the complexities involved in implementing this novel program, Tesla recommends that Treasury consider providing a date certain when it expects to issue such guidance in advance."

General Motors, the second-largest EV seller in the U.S., whose vehicles also are not currently eligible, said substantial transformation should be the standard for what counts as final assembly. It said it will be able to meet the critical minerals and battery input requirements, but said developing a localized supply chain "at scale will take time." It said that Treasury should listen to industry input to ensure consumers will be able to access the credits " as soon as reasonably practicable, while fully adhering to the text and intent of the IRA."

"Treasury guidance and any certification requirements should properly account for the realities and complexity of the battery supply chain. For example, critical minerals procured from one country are largely fungible with those procured from another; in many cases, minerals will be purchased from a variety of geographic sources and subsequently commingled and processed at supplier facilities into a single end product, such that it is infeasible to track exactly which minerals go into exactly which vehicle," GM wrote. So it suggests the proportion of compliant battery components and critical minerals purchased as a whole could then be allocated to the same proportion of vehicles; GM also asked that cars and trucks sold to commercial customers or to customers whose incomes are too high to qualify for the credit could be automatically treated as receiving the non-compliant inputs. "Treasury should allow companies to 'carry forward' and 'carry back' any extra volumes of IRA-compliant components and critical minerals to the subsequent or previous year’s production," GM wrote.

Autos Drive America, which represents the foreign automakers outside Detroit's Big Three, recommended that manufacturers be able to prove compliance with battery components or critical minerals by individual vehicle, model line, assembly plant or region, similar to the flexibility allowed under USMCA.

GM and Ford said that cells or anodes made in North America should count toward the input requirement, regardless of where sub-components come from. Similarly, it asked Treasury to apply the "foreign entity of concern" test only to key battery components and the critical minerals listed in the statute's Section 45X.

Ford encouraged the government to take the time it needs "to develop comprehensive guidance that clearly establishes for all affected parties -- automakers, suppliers, dealers, and customers -- what vehicles are eligible and what responsibilities each part of the value chain has to demonstrate compliance with the credit’s multiple complex criteria."

It suggested that any step of processing should count for the critical minerals friend-shoring requirement, for instance -- to yield battery-grade lithium hydroxide, there are four steps. Ford also asked that Treasury confirm that artificial graphite is not an applicable critical mineral.

For battery components, Ford said the "standard to meet 'manufacture or assembly' should be lower than the U.S. Customs concept of 'substantial transformation.'"

In order to establish a workable and sustainable verification process, the purchaser should be allowed to rely on the supplier’s certification for critical minerals and battery components. The suppliers are undoubtedly in the best position to certify that the critical minerals or battery components meet the applicable IRA requirements.

The Alliance for Automotive Innovation, which represents nearly all auto manufacturers with factories in the U.S., suggested that in addition to a cost methodology for the value of critical minerals in EV batteries, there could be a calculation of minerals by mass. It said it should only look at the critical minerals in the top six in a battery. The trade group, and most manufacturers, said automakers should have the option of measuring cost by sharing confidential information with Treasury about its actual purchases or an average commodity price for the previous year, provided by the Treasury Department.

Stellantis, the foreign company that is a parent to Chrysler, Dodge, Ram and Jeep vehicles, said the value of a battery component should include labor value and supplier profit. United Steelworkers disagreed, and said labor should not count.

Unlike some vehicle manufacturers, Stellantis suggested the component list should go deeper -- "cathode, anode, and separators that compose a battery cell. Minor casings, bolts, wires, etc. should not be included," it said. It referred to a CBP ruling on cathode active material as indicative as what should count as North American.

Stellantis, along with other manufacturers, noted a problem with how to apply the rules for credits, which become more stringent each year. The law uses a calendar year, which is not the same as the model year. Also, a vehicle could be manufactured in September 2023, sent to a dealer in December, and purchased in January 2024. It qualified when it was made and when it was first available for sale, but by the time it's purchased, the standard has changed, and it no longer qualifies. Manufacturers said the credit should be linked to the time of manufacture, not the date of sale for this reason. A coalition of environmental groups and advocates for low-income consumers said the same.

Some manufacturers thought the battery component tracing should go beyond the cell level.

Honda said it should go to foils coated with chemicals that form cathode and anode components.

Panasonic North America, which is the largest producer of EV batteries in North America,noted it relies on imports of components and critical minerals from Japan. "If Treasury chose to apply a limited definition of 'free trade agreement,' it possibly could exclude Japan, which would limit Panasonic’s ability to scale up its EV manufacturing in the short term while it worked to secure U.S. sourcing of critical minerals," the company wrote.

It said the battery component measurements should also go back to the spraying of foils that go into cathodes and anodes.

It said to determine the value of critical minerals, companies should be able to go by the cost for the specifcally listed minerals in the statute as a percentage of all minerals, or by weight or by mass or volume in a cell.

"We believe all battery components, not just the critical minerals, but also essential material inputs (nickel-plated steel, copper foil, anode material, aluminum top caps and foils, and anode and cathode tabs) should be included in this analysis. Manufacturing in North America and FTA countries of all battery components, not just critical minerals, is needed to ensure a stable supply base to produce batteries," Panasonic wrote -- but there needs to be transition periods so there can be more domestic mining, refining and production of component parts.

"Substantial transformation and other highly regulated customs rules should continue to be applied in this space. Introducing new requirements or legal frameworks just to apply to EV battery production under Section 30D would not only introduce legal and regulatory chaos, but it would stymie U.S. investment, production, research and development, and compliance," it said.

SK On, another major EV battery maker, said the calculation on North American components should be limited to "cathode, anode, electrolytes, separator, cell, and module," which they said are more than 80% of all components in a battery. It supported substantial transformation as the measure of North American assembly.

The Coalition for American Battery Independence, which represents battery manufacturers, mineral producers and automakers, also supported the idea of an annual mineral value published by the Treasury.

"The commodity price of a critical mineral is extremely volatile and can swing to different extremes over a short period of time. If the value of a critical mineral were based on its current market value, then battery manufacturers and OEMs would be unable to plan ahead and ensure they can comply with the requirements," the coalition wrote. It also asked that the components go no deeper than the battery cell.

"If a battery component were to be considered at a lower level, such as at the electrode material level, it would be too complicated for OEM’s to accurately track the information of a battery component and comply with requirements," it said.

The UAW, in contrast, asked that "battery component content should include all phases of battery cell production, such as mixing of materials, coating, drying, slitting, calendaring, electrolyte filling, degassing, and aging, and packaging of cells. A comprehensive definition of battery cell production is essential to avoid companies claiming regional battery production with minimal assembly work."

LG Energy Solutions, another major battery maker in the U.S., has two plants in operation but is building three more. "Currently, it is extremely difficult to build most clean energy technologies, including EV batteries in the United States, without using certain foreign-made parts and, specifically, raw materials extracted or processed in China," it wrote.

The company "has a roadmap to secure major raw materials for our batteries and expect most of our localization to be done by 2025, and fully by 2027," it wrote. But the critical minerals friendshoring requirements begin in 2024.

LG is concerned about the "foreign entity of concern" restriction for critical minerals. It could be defined that any Chinese company involved in processing critical minerals makes a battery ineligible for half the credit.

"Although some non-Chinese alternatives exist, it is not clear that there is enough non-Chinese supply to support a massive, rapid shift from Chinese-extracted or processed materials. Further, even if non-Chinese partners could support the needs of the entire EV battery industry, the increased demand would mean significantly increased costs for battery makers, OEMs, and ultimately consumers, potentially slowing the market shift to clean vehicles," LG wrote.

"To make this work on a practical level, it is also very important that Treasury apply a de minimis rule, such that minerals below a certain percentage of the battery value are not considered for purposes of determining whether minerals have been extracted or processed by foreign entities of concern," LG said, and suggested it be set at less than 5% of the value of the battery.

The company suggested the cost of precursors used to process critical minerals be included in calculations. "For example, the processing of nickel, cobalt and manganese derives a precursor, which, with the addition of Lithium, turns into a Cathode. Thus, it would make no practical sense to leave them out of the minerals calculation in 30D. We recommend that the value of precursors should thus be included in the denominator, and, where they are processed in the U.S. or an FTA country, in the numerator as well."

LG said the components in the calculation for the North American battery component part of the credit should be limited to the battery cell, the battery management system, the housing and the wiring harness.

A number of commenters noted that battery plants are already planned that will come online in 2025, including from Samsung and Toyota.

The Japan Automobile Manufacturers Association wrote, "unless mitigated administratively, the clean vehicle credit would have the counterproductive effect of narrowing consumers’ ability to access [plug-in hybrid vehicles] and [EV] tax credits due to the stringent battery-related sourcing and “Foreign Entity of Concern” (FEOC) requirements/timelines among other factors." The 14 companies in JAMA said they question whether the guidelines are feasible, and wrote, "these credits may cause an extraordinary burden to stakeholders involved and reduce the credits’ effectiveness in increasing consumer adoption of clean vehicles."

Hyundai Motor Group, which includes Kia and Hyundai, sells six EVs, but the first U.S. vehicles will be ready in 2025. It asks Treasury to allow its South Korean-made cars to continue to qualify for the credit while the Georgia plant is under construction. It says that excluding Korean-built cars "is contrary to both the letter and the spirit of the U.S.-Korea FTA -- particularly when HMG has already committed and is in the process of complying with the North America final assembly rule."

"A detailed guidance document for critical minerals is essential. It is important that the requirements are clearly defined without any ambiguity on interpretation. HMG also recommends that Treasury issue guidance quickly, ideally by the statutory deadline of December 31, 2022, so that final assembly manufacturers have time to work with their suppliers, dealers, and ultimately customers," the company wrote. It also said Treasury may need to add flexibilities if minerals are not available either domestically or from an FTA partner "in quantities needed for mass battery manufacturing."

"Although HMG understands the reasoning behind the critical mineral and battery component requirements, including the foreign entity of concern prohibition for [tax credit] eligibility, it is important to note that, at present, the majority of supply for critical minerals and battery components is heavily dependent on foreign entities of concern. Establishing resilient global supply chains that exclude such entities will take time, and the rigid enforcement of this requirement in the interim has the significant potential to adversely impact consumer adoption of EVs," it wrote. It suggested that a joint venture with a Chinese firm, or a subsidiary of that firm that has minority Chinese government ownership, should not count as a foreign entity of concern.

The European Automobile Manufacturers Association wrote, "The local content requirements for battery minerals and components are excessively ambitious and do not reflect reasonable expectations in terms of what can be achieved in building a localized battery supply chain in such a short space of time. In any event, financial incentives that link eligibility to domestic content requirements are almost certainly non-compliant with the WTO commitments of the US. Most EU member states have financial incentives for sales of low and zero emission vehicles and none of them apply any similar requirements."

EV LIFE agreed, and said Treasury should delay the input rules until 2025. "While Ford, GM, and Tesla may meet battery assembly requirements, zero EV manufacturers may qualify for the Battery Component sourcing requirements, worth $3,750 of the EV tax credit. GM’s CEO recently noted that it could take 2-3 years to meet the battery sourcing requirements for the credit. We recommend giving automakers a grace period through 2025 to give automakers time to invest in battery sourcing to meet the requirements. If milestones should be required, we would recommend granting exemptions to automakers who present credible evidence of their investment to meet future battery component sourcing requirements to be granted an exemption and receive the $3,750 credit for battery sourcing to enable more consumers to afford EVs."

Zero Emissions Transportation Association also said a longer transition is needed.

The Colorado Energy Office wrote, "Our overarching concern is that the domestic content and final assembly requirements, while important to increasing domestic manufacturing in the long term, will in the short and medium term hamper EV adoption as we await capital flows to cement domestic manufacturing of these vehicles. We urge you to explore opportunities for flexible implementation of these requirements, particularly over the next five years, while the necessary supply chain is developed."

But not all trade groups said more flexibility is needed. The BlueGreen Alliance, a coalition of labor and environmental groups, said, "The Treasury Department and Internal Revenue Service (IRS) should uphold and honor this intent by limiting the use of general waivers for the requirements that constitute the Clean Vehicle Tax Credit, and holding firm against industry interests that would loosen the terms of the credit in the interest of maintaining their business-as-usual operations, and minimizing impact to their supply chains and profit margins."

The National Mining Association said, "These goals of new domestic sourcing for production and processing are a necessary part of new domestic manufacturing in this critical sector, and the goals of these tax credits are achievable."

Australia, which is the leading miner of some critical minerals and an FTA partner, noted, "The Australian mining sector is reliant on foreign capital for its development and Australian companies frequently have foreign shareholders. Australia reviews foreign investment proposals on a case by case basis to ensure they are not contrary to the national interest. It would be helpful for the industry to understand if, and what level, foreign equity might trigger classification as a foreign entity of concern and how mitigating factors, like foreign investment screening may be considered."

Korea and the European Union both complained about the requirement that vehicles be assembled in North America to qualify, irrespective of the battery issues. That part of the law took effect in August, and those countries' automakers suddenly lost eligibility for a number of exports. Both the EU and Korea said the law contradicts U.S. commitments in the World Trade Organization. Korea said it should qualify, just as Canada and Mexico do, since it also has an FTA. But if not, "a grace period of three years should be provided for the implementation of clean vehicle tax credits, given that Korean companies have committed to investments in the United States but it will take up to three years to complete construction."

The European Union made a point of saying its formal comments are only part of its engagement with the U.S. government, "through which it hopes to find constructive and amicable solutions to the concerns expressed."

It complained about tax credits linked to localization in many parts of the bill, not just the consumer EV tax credit, and said six of the credits are clearly in breach of WTO rules.

"The approach set out in the problematic provisions of the Act may encourage other economies to follow the United States’ example in deploying protectionist and discriminatory measures," the EU wrote.

It asked that the EU be included everywhere other countries are given preference. Norway wrote, "We would also like to point to the fact that although the Norwegian economy is highly integrated into the European economy and part of European value chains, Norway is not a member of the European Union. Should the US and the EU find solutions regarding the concerns the IRA represents for European industry, it is of vital importance for Norway to be covered by such arrangements."