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Changes to EV Tax Credits Postpone US Electrification Independence
Redwood Materials, Tesla
The DOE announced changes that make it easier for car makers to qualify for EV tax credits by adding Japan and South Korea to countries that can supply the anode and cathode to battery cells assembled in the US. This is a long-term headwind to the US gaining electrification independence.

Key Takeaways

For five months, the EU has been pressuring the DOE to add more European car makers to the EV tax credit list.
European and South Korean car makers will likely be added back to the EV tax credit list over the next year.
The battery supply chain is still anchored in Asia, which is a headwind for US electrification independence.
While the changes remove a tailwind for US battery makers, demand for US-made batteries will outpace supply for the next decade.

European and South Korean car makers take issue with the IRA

The IRA was signed into law in August of 2022. One component of the legislation was bringing back the $7,500 EV tax credit to increase EV adoption and make the US electrification supply chain less reliant on China. The goal was to incentivize car makers to do final assembly in the US and increase demand for battery components and critical battery mineral sourcing in the US.

In November, the 27 EU nations agreed that the incentives posed by the IRA could damage their economies by reducing the price of US-made EVs by an average of 12%, making it harder for them to compete. That concern was echoed by South Korea.

Last December, I wrote that a potential tweak was in store for the IRA related to expanding the list of EVs eligible for the $7,500 US tax credit to smooth over the tensions with European trading partners.

On April 17th, the DOE announced changes that make it easier for car makers to qualify for EV tax credits by adding Japan and Korea to countries that can supply the anode and cathodes to battery cells assembled in the US. Previously a car maker needed to source a percentage of the battery’s anode and cathode in the US to have their vehicles qualify for the $7,500 credit.


A win for EV makers

While four European car makers (VW, Audi, BMW, and Volvo) were dropped from the list of tax credit eligible EVs on April 17th, they will likely be added back over the next year because qualifications were eased with the change to the anode and cathode sourcing requirements.

It’s worth noting the list of vehicles that qualify is quickly changing. On April 17th, it included 18 models. By mid-day April 18th, the list had grown to 22 models.

The anode and cathode are critical components of a battery – the Cathode Active Material (CAM) makes up 80% of the cost of a battery and 15% of the overall cost of an EV. Expanding the number of countries eligible to supply those components will make it easier to assemble EVs eligible for the tax credit.


Watering down a main goal of the IRA

For starters, it’s worth defining what I call “electrification independence.” I see it as a country’s ability to produce the components that will enable the electrification of everything. The most important building blocks include manufacturing battery-powered products and sourcing and manufacturing batteries, all within the US.

With respect to EVs, the IRA originally had two goals. First, increase demand for EVs to reduce the US’s reliance on oil, mostly to promote clean energy. Second, to build an electrification supply chain in the US that is independent of China and Asia more broadly.

However, these changes to the IRA support increased reliance on Asian countries and reduce incentives for building battery infrastructure in the US. Although Japan and Korea are strong US allies, I believe it’s in the US’s best long-term interests to bring battery manufacturing resourcing and expertise onshore.


The rising tide

The changes to IRA water down a tailwind that companies like Redwood Materials and other US anode and cathode makers picked up last summer from the IRA. That said, those companies are still well positioned given the rising tide of demand for batteries and battery components. The industry simply can’t keep up with demand. Even as more production comes online in the US, it will likely take a decade for the industry to reach supply-demand equilibrium.


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