The Inflation Reduction Act’s Big Bet on Electric Vehicles

Electric vehicle (EV) sales in the United States grew by 85% between 2020 and 2021 – the largest increase to date. To continue this growth and promote additional investment in EV production, Democratic lawmakers passed the Inflation Reduction Act of 2022 (IRA) in August, the largest piece of climate change legislation in the U.S. to date. The IRA offers American households a $7,500 tax credit for electric vehicles purchased in January 2023 or after. These credits will apply to a limited range of EVs produced in North America and meet materials and mineral sourcing and manufacturing criteria outlined in the bill. The goal of the tax credit is to reduce transportation-related climate emissions by incentivizing EV purchases and shift the EV supply chain to the United States and its trading partners.

The IRA is a byproduct of negotiations dating back to the start of the Biden Administration in early 2021. The Build Back Better Act was the Democrats’ original spending package, which included a baseline $7,500 tax credit for plug-in electric vehicles. While the legislation passed the House, it was stalled in the Senate by more moderate Democrats. Lawmakers focused instead on passing the American Rescue Plan and the Bipartisan Infrastructure Law, the latter of which allocated $7.5 billion to develop and improve EV charging infrastructure across the nation. After West Virginia Senator Joe Manchin struck a deal with Senate Majority Leader Chuck Schumer in July, Democrats moved quickly to pass the IRA. It invests $433 billion across healthcare, climate, and tax credits, $360 billion of which will go directly to energy and climate change programs.

The IRA EV tax credit provides $7,500 to individuals making $150,000 or less and to couples making $300,000 or less. If purchasing a used vehicle, the credit is capped at $4,000. The bill also establishes manufacturing and sourcing requirements for eligible vehicles. The tax credit is divided into two components, a critical minerals component and a battery component, each worth $3,750 independently. So, both components must be met by the automaker for the consumer to receive the full tax credit. According to the bill, at least 40% of EV battery’s critical minerals must originate in or be manufactured in the U.S. or one of its free-trade partners. Similarly, at least 50% percent of the EV’s battery components must be manufactured or assembled in North America. For both components, the minimum mineral percentages increase annually until they hit 100% in 2029. Starting in 2024 and 2025 respectively, there are further restrictions on vehicle batteries and critical minerals originating from a foreign entity of concern, which includes both Russia and China. These provisions aim to shift EV supply chains to the U.S., as the majority of EVs are currently produced in China. At this time, however, large EV automakers like Toyota and Tesla continue to invest in production facilities there.

Based on these eligibility criteria, few electric vehicles in the U.S. qualify for the tax credit. Currently, there are 72 EV models available in the nation, 70% of which are ineligible for the credit. The lithium-ion batteries commonly used in EVs are predominately manufactured in China, requiring supply chains to substantially change to meet the IRA’s conditions. If EVs currently on the market fail to meet the tax credit conditions, there will be no eligible EVs that meet the IRA’s criteria by 2029. Parts of the EV supply chain have begun shifting to the United States, spearheaded by manufacturers like Stellantis and General Motors who are opening battery production facilities across the Midwest. Although the IRA provides tax incentives to those manufactures, the transition is expected to take time and be costly. On the other hand, Ford and Toyota are attempting to ease these pains by asking the Department of Treasury to loosen the IRA’s restrictions. Changes proposed include explicitly adding Japan as a sourcing and manufacturing partner. Similarly, the European Union has recently voiced concerns over the IRA, claiming that it violates the World Trade Organization’s trading rules. The EU claims that the tax credit restrictions will harm European EV producers by giving preference to American manufacturers and has called for a new trade deal with the U.S. The European Commission cited fears of a “subsidy race to the bottom”, leading to tit-for-tat retaliatory measures amongst automakers globally and threatening the stability of the transatlantic trading alliance.

Regarding the environmental effects, the Department of Energy projects that the IRA will lower economy-wide greenhouse gas (GHG) emissions to 40% below 2005 levels. This will help achieve President Biden’s goal of reducing GHGs by 50% by 2030. Reductions in transport-related emissions are projected to be one of the largest factors. The U.S. could see a decrease of anywhere from 7 to 31 net million metric tons of CO2 emissions according to the Rhodium Group, an independent research provider. However, automaker production and sales methods can also affect the rate of emissions reductions. Most vehicle manufacturers do not replace their entire inventory each year, so only a small portion of the total cars sold will be EVs. Full market saturation for EVs may be a while away and depend on how quickly automakers shift to prioritizing the production and sale of EVs. This means that reductions in transportation emissions will take longer to occur. From a consumer perspective, overall EV adoption in the U.S. remains slow—less than 10% of new cars sold in 2021 were a hybrid or an EV. This is partly due to the high demand for trucks and SUVs, which tend to produce more emissions. It is also important to consider the nonpoint sources of transportation emissions, which may further complicate the IRA’s effectiveness.

Contrary to popular belief, EVs still emit large amounts of pollution that are not from the tailpipe. The energy generated to charge an EV predominately comes from coal-fired power plants. These power plants account for two billion metric tons of CO2 per year, a value that could grow exponentially with greater use of EVs. Brakes, tires, and dust emit air pollution that disproportionately impacts low-income and historically underrepresented communities of color. Current mineral mining processes in countries like the Democratic Republic of the Congo create inhumane working conditions and have resulted in the high exposure of toxins to children and nearby communities.

While the IRA attempts to mitigate the minerals problem through domestic production shifts, it does not provide context on how EV production can become more sustainable. For example, the U.S. has a large supply of the critical mineral nickel, but its production methods are too carbon-intensive to meet environmental regulations, and only a few companies have the capability to do so. This runs the risk of creating an upstream oligopolist market, where only a few producers are responsible for most critical mineral production. Consumers would potentially face higher costs, which may functionally negate the benefit of the initial tax credits. President Biden has taken some initiatives, such as invoking the Defense Production Act to free up money for exploring the domestic production of graphite, but the timeline and implications of such efforts are ambiguous. The IRA lacks a specific strategy to incentivize producers at different stages of the EV supply chain to change their sourcing practices and meet the bill’s new requirements. Without a more specific vision for this, the IRA’s true positive effects remain to be seen.

Overall, the IRA provides substantial policy changes to the current EV tax credits. This will have major effects on the global EV supply chain and will shape the rate of GHG reductions in the U.S. But how quickly the market can adapt and what the true environmental changes will be because of the IRA are unknown. While the bill is a major step in the right direction, it is a long-term and one-dimensional approach. The only way transportation emissions can be significantly reduced is through a multifaceted approach that prioritizes sustainable mass transit alongside EVs. In the short-term, the U.S. must consider alternative policy approaches such as investment in bus rapid transit and light rail. Such systems can take advantage of existing road infrastructure and be interlinked with current and new rail systems to make transferring between modes of transportation easier, positioning public transit as a more viable and appealing alternative to riders.

---

Burga, Solcyre. “What You Need to Know About the Inflation Reduction Act.” Time, August 8, 2022. https://time.com/6204537/inflation-reduction-act-whats-in-it/.

Congress.gov. “Text – H.R.5376 – 117th Congress (2021-2022): Inflation Reduction Act of 2022.” August 16, 2022. http://www.congress.gov/.

Daugherty, Alex. “’It’s so Blatant’: Transit Groups Bemoan Dems’ Car-Centric Climate Deal.” Politico, July 28, 2022. https://www.politico.com/news/2022/07/28/transit-democrats-car-climate-deal-00048599.

Freemark, Yonah. “What the Inflation Reduction Act Did, and Didn’t Do, for Sustainable Transportation” Urban Institute, September 15, 2022. https://www.urban.org/urban-wire/what-inflation-reduction-act-did-and-didnt-do-sustainable-transportation.

Popli, Nik. “The Inflation Reduction Act Will Soon Make It Cheaper to Buy EVs—If They Have North American Batteries.” Time, August 16, 2022. https://time.com/6206639/electric-vehicle-tax-credits-inflation-reduction-act/.

Rep. Clean Vehicle Tax Credits in the Inflation Reduction Act of 2022. Congressional Research Service, August 24, 2022. https://crsreports.congress.gov/product/pdf/IN/IN11996.

Rezvani, Arezou. “What the Inflation Reduction Act Means for Electric Car Buyers and Auto Companies.” NPR. August 19, 2022. https://www.npr.org/2022/08/19/1118519199/what-the-inflation-reduction-act-means-for-electric-car-buyers-and-auto-companie.