Biden Administration Pressed by Allied Nations to Revise EV Subsidy Program

Source: By Yuka Hayashi, Wall Street Journal • Posted: Wednesday, November 30, 2022

Officials seek to balance clean-energy goals with efforts to work more closely with allies to counter China

Electric vehicles must undergo final assembly in North America to qualify for up to $7,500 in tax credit, disqualifying most from non-U.S. car makers.PHOTO: JEFF KOWALSKY/AGENCE FRANCE-PRESSE/GETTY IMAGES

WASHINGTON—The Biden administration finds itself caught between its domestic-policy goals and some of its closest allies as it races against the clock to set the ground rules for new electric-vehicle subsidies.

The Treasury Department’s Internal Revenue Service faces a year-end deadline to propose a guideline for how to qualify for EV tax incentives of up to $7,500 per vehicle under the tax and climate spending legislation known as the Inflation Reduction Act that President Biden signed in August.

Congress designed the subsidy program as a means to accelerate a transition to cleaner vehicles. But it also wants to use the program to turbocharge the domestic EV industry to create more U.S. jobs and to cut reliance on China, which now dominates production of EV batteries and their components.

That has put the U.S. at odds with the European Union, South Korea, Japan and the U.K., which object to measures in the legislation that require eligible vehicles to be assembled in North America and impose stringent rules for sourcing and manufacturing of batteries. The European and Asian governments say it discriminates against their companies and may violate World Trade Agreement rules.

Representatives of the U.S. and the EU are expected to discuss the issue at the Dec. 5 meeting of the bilateral Trade and Technology Council. During his state visit to the U.S. this week, French President Emmanuel Macron is also expected to press Mr. Biden to resolve the dispute before the end of the year.

The new EV subsidies replace a program that provided a $7,500 tax credit for any electric or plug-in hybrid vehicle up to 200,000 vehicles sold by the manufacturer.

Public comments submitted to the IRS by foreign governments and auto manufacturers—among more than 800 submissions through a public-comment period that ended in early November—underscore the difficulty of the task the administration faces.

The Biden team is seeking to balance the goals of its clean-energy and China-competition policies with its pledge to work closely with its allies to combat global challenges such as strengthening economic security and supply chains to counter China and Russia.

​While the Inflation Reduction Act set the framework for the tax incentive program, foreign government and auto-industry officials say they are hoping the Treasury will address some of their concerns through flexible interpretation of the law.

The South Korean government asked for amending what it said were discriminatory assembly and component requirements or to delay the implementation of the tax credits by three years. It asked the Treasury Department to interpret the law’s provisions “in the least restrictive manner possible to minimize negative impact on foreign investment and resolve inconsistencies with U.S. international obligations.”

In its comment, the EU warned that the measures, if implemented in their current form, could “trigger a harmful global subsidy race” for key green technologies and inputs while creating “tensions that could lead to reciprocal or retaliatory measures.”

Treasury Secretary Janet Yellen has said the U.S. would seek to address concerns of its trading partners, while emphasizing the mandate set by Congress.

“There are aspects of legislation that they may not fully understand that may be more positive in addressing their concerns,” she said, following her meeting with French finance minister Bruno Le Maire during the Group of 20 gathering in Indonesia on Nov. 13.

Meanwhile, Sen. Raphael Warnock (D., Ga.) has introduced legislation to delay the phase-in period for some requirements by up to three years. In Georgia, Hyundai Motor Group is building EV and battery plants, but they won’t start operating until 2025. The company currently ships all its EVs from South Korea. Some Democrats in the House of Representatives have introduced a companion bill.

Treasury Secretary Janet Yellen has said the U.S. would seek to address trading partners’ concerns while emphasizing Congress’s mandate.Photo: shawn thew/Shutterstock

U.S. auto makers and unions have generally welcomed the new program, in part because it removes the existing 200,000-vehicle cap that had put established EV sellers at a disadvantage.

In its comment to the IRS, the United Auto Workers said it strongly supports the new subsidy program. “Implementation of these provisions should be crafted in a way that creates firm standards that support domestic investments in the U.S. auto industry while also supporting the maintenance and creation of quality union jobs,” it said.

To qualify for up to $7,500 in tax credit, vehicles must go through their final assembly in North America, a requirement that disqualifies most electric vehicles from non-U.S. car makers since they are typically assembled overseas, unlike many of their popular gasoline-powered models built at their North American plants.

The new rules also require EVs to have at least 40% of their critical minerals for batteries sourced in the U.S. or countries that have free-trade agreements with the U.S. starting in 2023. That threshold is set to rise to 80% by 2026.

Vehicles also must have batteries that are least 50% North American content by 2024 and 100% by 2028.

The Biden administration has set up a high-level task force with the EU to discuss the legislation, which includes seven other provisions unrelated to EVs against which the EU has lodged complaints.

Auto-industry and trade officials say no vehicle will be eligible for the full $7,500 credit in January because of the battery-sourcing requirement. But top executives of Ford Motor Co. and General Motors Co. have said during recent earnings calls that some of their vehicles will qualify for half of the credit come January.

“We expect the U.S. Inflation Reduction Act to have a wide range of positive impacts for both our customers and for Ford,” Ford Chief Executive Jim Farleysaid during the company’s third-quarter earnings call.

—Andrew Duehren contributed to this article.