EV Battery Rules Allow de Minimis Exception, Require Component Tracking

Described in a proposed rule released Dec. 1 by the Treasury Department, the strict supply chain tracking requirements are meant to trace the proportion of the components of North American origin and guarantee no Chinese-built components are in the battery. They are only applicable to vehicles assembled in North America. Batteries and components will have to be tracked through a serial number or "other identification system."

The Treasury proposal outlines what components are ineligible for the tax credit due to their connection to a foreign entity of concern. Any components manufactured in China are out; so are components manufactured elsewhere if a Chinese-headquartered firm makes them. Even a company that has 25% of its board members or 25% of its equity owned by Chinese government or former government officials will be considered a foreign entity of concern, and a joint venture that has 25% Chinese government ownership is also barred from the credit.

The Energy Department described multiple minority ownership scenarios in its interpretation. However, it is still unclear whether the licensing deal Ford wanted to undertake with CATL for battery technology in Michigan will fall under the foreign entity of concern.

The restriction on components takes effect on Jan. 1. However, some low value components will be exempt. The administration said it believes critical minerals contained in electrolyte salts, electrode binders, and electrolyte additives are not traceable. The agency wrote: "Where battery materials make up only a very small percentage of the value of the battery as a whole, many industry participants, prior to the passage of the IRA, had little reason to trace the source of these materials. As a result, unlike with higher value battery materials, tracing the source of these low value materials is not immediately feasible, which makes it in turn not feasible for qualified manufacturers to provide the necessary assurance to the IRS that their materials are [foreign entity of control] compliant."

Another restriction on critical minerals will begin Jan. 1, 2025. However, the government will allow a transition period for certain materials and associated constituent materials, where those materials won't have to be traced to specific batteries, but the purchases of non-Chinese processed or mined minerals can be allocated to the constituent material where they are used, such as powders of cathode active materials, powders of anode active materials, or foils.

These "materials each account for less than two percent of the value of applicable critical minerals in the battery, and the Treasury Department and the IRS understand that industry tracing of these particular applicable critical mineral production processes is uncommon and third-party standards for doing so are underdeveloped. Other materials for inclusion could include, for example, other low-value electrode active materials that also are subject to the traceability difficulties," the rule says. They asked for comments on what those materials might be.

In this rule, that transition period is two years; however, the agency asked for comment on whether tracking will be possible by the end of 2032, "and, if not, whether allocation-based accounting should be included as a permanent compliance approach, rather than as a temporary transition rule."

Auto companies welcomed the guidance, as they saw it as containing enough flexibility to allow at least some cars to continue to qualify for the purchase credit.

Autos Drive America CEO Jennifer Safavian said, "International automakers are investing heavily in the U.S. to boost clean vehicle production with nearly $30 billion provided for green vehicle manufacturing. While automakers in the U.S. are working to build up domestic supply chains and diversify their sourcing, this shift will take time.

“We urge the administration to secure critical mineral agreements with allied nations in order to provide the U.S. with the minerals needed to produce EVs and accelerate this transition.”

Alliance for Automotive Innovation CEO John Bozzella wrote: "Treasury exempted trace materials from the FEOC [foreign entity of concern] guidance for two years. That’s significant and well-advised. Otherwise the EV tax credit may have only existed on paper.

"We argued a fastener used in an EV battery assembly, dipped in a material from an FEOC shouldn’t disqualify the battery or EV (and ultimately the consumer) from the credit. Imagine an EV that complied with all IRA eligibility requirements but is kicked out because of a negligible amount of a critical mineral or component coming from an FEOC. That wouldn’t make sense -- or good policy."

He called the regulation pragmatic, but also said it remains to be seen if the number of vehicles that qualify now -- 20 -- shrinks in the new year.

"It’s important (for economic and national security) that the U.S. controls its own destiny with supply chains and raw materials sourced domestically or from allies. That will happen. In fact, it’s already happening all over the Midwest and Southeast," he wrote. "But the EV transition requires nothing short of a complete transformation of the U.S. industrial base. It’s a monumental task that won’t happen overnight. The Treasury guidance recognizes the complexity of this task and the challenges facing automakers with some good balance."

The Zero Emissions Transportation Association also praised the guidance, saying it balances the desire to bring mid-stream and upstream production to the U.S. while still supporting growth in domestic battery and vehicle manufacturing.

Politicians who fear electrification of transportation will give China too much leverage in the U.S. economy blasted the rule.

House Select Committee on China Chairman Mike Gallagher, R-Wis., said: "At a time when China is using massive subsidies to undercut US manufacturers and throttle the global market for battery components, Treasury’s naive new regulations would open the floodgates for American tax dollars to flow to Chinese companies complicit in trade violations and forced labor abuses. Instead of securing critical supply chains and protecting vital American industries, Treasury’s rules will sell out American workers and increase our dependence on Communist China."

Sen. Joe Manchin, D-W.Va., who pushed for restrictions on the credits to drive production out of China and to the U.S., threatened the administration with a congressional veto of its regulatory approach, as allowed for in the Congressional Review Act. He said he also would support a lawsuit challenging the rule.

"The Inflation Reduction Act clearly states that consumer vehicles are ineligible for tax credits if 'any of the applicable critical minerals contained in the battery' come from China or other foreign adversaries after 2024. But this administration is, yet again, trying to find workarounds and delays that leave the door wide open for China to benefit off the backs of American taxpayers. The Inflation Reduction Act is a once-in-a-lifetime opportunity to onshore our supply chains and invest in American workers. I will take every avenue and opportunity to reverse this unlawful, shameful proposed rule and protect our energy security ... ."

Manchin also blasted the biggest workaround the administration created, which was to allow dealers to apply for credits for cars they would lease to consumers, and those $7,500 credits are not dependent on North American assembly or any rule of origin for batteries and critical minerals. But the administration has not changed that approach.