Sometimes public policy gets skewered on the horns of a dilemma.
The Buy American provisions of the Inflation Reduction Act are aimed at protecting US jobs (and national security) by making EVs with substantial amounts of battery components from “nations of concern”—namely China—ineligible for tax credits. That’s a worthy goal, but to a certain extent it conflicts with the IRA’s more central objective of quickly increasing EV adoption.
Automakers and suppliers are scrambling to secure domestic sources of critical mineral and components, but disentangling from China, which dominates crucial parts of the EV battery supply chain, will take time.
As of mid-January, only 13 of the 50 or so EVs currently on sale in the US appeared to be eligible for the credits. In 2023, before some of the Buy American rules started to bite, some 24 models were eligible. (Volkswagen recently announced that “most 2023 and 2024 model year ID.4 SUVs” are eligible for the full federal tax credit this year.)
Some of the most popular models—the Tesla Model Y, Chevrolet Bolt and Rivian R1T pickup—still qualify, but others—the Ford Mustang Mach-E and Nissan LEAF—do not.
Automakers are experimenting with different battery chemistries and formats, so different trim levels and variants of the same model may or may not qualify for the credits. For example, Tesla offers different battery options, so some variants are eligible and some aren’t.
Most industry observers expect the reduced selection of tax-credit-eligible EVs to be a temporary problem, as automakers have a strong incentive to bring their supply chains into compliance tout de suite. Furthermore, some may discount the prices of non-eligible models—GM has already announced plans to do so.
“There’s still enough variety out there in terms of vehicles,” Elizabeth Krear, Vice President of J.D. Power’s EV practice, told the Associated Press. “There are still the incentives that we’ll see from automakers as they balance their inventory. There are still automakers that are going to work their supply chains throughout the year to come back into the fold. This would be a near-term hiccup.”
Consumers who are interested in leasing can get the credits in any case—a loophole in the IRA defines leased EVs as “commercial vehicles,” which are not subject to the same Buy American requirements. Leasing is already a popular option for EV drivers as an Osbornian hedge against poor resale values driven by the constant stream of performance improvements. J.D. Power expects the proportion of leased vehicles in the US, which doubled to 26% in 2023, to continue to grow.
The worst aspect of all this may be increased consumer confusion about EVs (which is already rampant). One EV-curious buyer told the AP that uncertainty over the tax credits may lead her to opt for a hybrid instead: “Do you get a break, do you not? Will it apply next year, who knows? You’re playing the odds as to whether the benefit will be there when you’re ready to purchase.”