Our team spends most of its day supporting EV owners as they explore battery health and range degradation. However, our overall mission is to promote electric vehicle use across the board, so we’re turning our attention to a more broad topic: federal support for transportation electrification in the US. Like a lot of new technology, EVs can use a helping hand to reach price parity with existing options. Tax credits are an important step that the government has taken to encourage the adoption of electric vehicles and to support the transition. On July 26, a new set of EV incentives was proposed, and for the first time, the federal government may assist with the purchase cost of used EVs.

Recurrent is in a unique position to comment on the effects of the new EV tax credits, since we are a leading authority on the used EV market, including price and inventory trends. We have been analyzing and tracking the growth of the second-hand sector since March 2021 and we understand market drivers. Any changes to the new EV market inevitably influence the used market.

Overview: Inflation Reduction Act

The Inflation Reduction Act of 2022 was approved by the Senate on August 7, 2022 and the House of Representatives on August 12. It is a sweeping bill that adds prescription drug caps to the cost of medication for seniors, renews the affordable care act, imposes a minimum corporate tax, and reinvigorates incentives for and investment in clean energy. There were some significant compromises in terms of both tax reform and support for domestic oil, but climate advocates agree that is an important step forward to curb carbon emissions and help the US meet its Paris Accord goals. Estimates put the contribution of this Act at one billion tons of carbon avoided over the next ten years. 

US National Used EV Tax Credit

US congressional leaders have agreed to a bill that would expand the existing $7,500 new EV tax credit while introducing the first federal tax credit for used EVs. Since the US added EV tax credits in 2010, no direct-to-consumer, federal assistance has been dedicated to used EVs. 

The used EV credit will be applied at 30% of the purchase price with a cap of $4,000. 

How the Used EV Tax Credit Works

The 2023 EV credits can be applied at point-of-sale, which is a major win for low and moderate income families who may not have the financial freedom to wait until tax season for incentives. The credit will also be issued as a percentage of the purchase price, rather than at a fixed amount. 

The used EV credits would be limited to individuals with an adjusted gross income of $75,000, a head of household income up to $112,500, or joint filers with adjusted gross incomes of up to $150,000. EV purchasers are eligible for the used credit once per three years. 

When Does The Tax Credit Take Effect? 

The updated new and used EV incentives will apply to vehicles purchased after December 31, 2022 and expire December 31, 2032.

Which Used EVs Are Eligible? 

All plug-in electric vehicles with batteries at least 7 kWh are eligible if they meet two criteria:

  • The model year must be “at least 2 years earlier than the calendar year in which the taxpayer acquires” it, and
  • The cost is under $25,000

Since the new bill proposes lifting the sales cap for eligible vehicles, the used EV credit will apply to Tesla and GM models that lost their eligibility in 2019 and 2020, respectively. It will also cover Toyota, which just hit the 200,000 vehicle cap this year. 

Other restrictions include that the vehicle must be purchased from a licensed dealer for personal use, and each vehicle can only qualify for this credit once. The credit may be applied at time of sale by the dealer, which can be a great benefit for shoppers with tight budgets.  

What Changed for New EV Incentives

There are a lot of structural changes to the tax incentives for new EVs, as well. We do a deeper dive below, but in short:

-There is no longer a cap on the manufacturer's sales, so Tesla, GM, and Toyota models can continue to get the tax credit for new sales.

-For electric sedans, hatchbacks, and cars, the MSRP when new must be under $55,000, while electric vans, trucks, and SUVs must have a MSRP under $80,000. 

The $7500 credit is also broken down into two categories, based on source of materials, rather than battery size:

  1. $3750 of the credit will be applied if a percentage of battery critical minerals are sourced from the US or a country that has a free trade agreement with the US
  2. $3750 of the credit will be applied if a certain percentage of the battery source comes from the US or a country that has a free trade agreement with the US

Both of these material requirements open the door for growth in the battery recycling and material reuse industries, since US-recycled materials would count as US-sourced. Finally, the bill stipulates that final vehicle assembly must take place in the US. 

What Will Tax Credits Do To The Used Car Market? 

We cover the used EV market in our quarterly report. In the latest report, we found that used EV sales are growing as a percentage of total EV sales.

Used EV trends in 2022

Recurrent CEO Scott Case commented on this after the introduction of new tax credits: 

The used car market is twice the size of the new car market, so in a lot of ways this used EV credit is more important than the new EV tax credit over the long term. Many more future EV shoppers will be looking for used cars than for new ones, so this bill has the potential to help a lot more drivers.

The future certainty of both the new and used EV tax credits is really important. Norway's EV incentives are still going strong even at 80%+ of new sales. Long-term policies like this are the way to guide market transformation. 

There are some interesting sharp corners in the used EV tax credit guidelines that will probably need to get sanded down: the abrupt limit at $25K creates some perverse pricing incentives (vs. a phase out price limit). Also, there is the fact that each vehicle can only be eligible for one used tax credit. Since many EVs are priced well above $25K and are holding their value quite well, it may take 3 or 4 sale cycles for a particular EV to be eligible for this tax credit. 

It's also worth pointing out that the sub $25K market has the oldest vehicles with potentially the most variable battery conditions, so it's going to be super important for buyers to understand what they are getting in terms of the battery with those vehicles. Putting a tax credit on a cheap car whose battery is about to die doesn't help anyone, which makes Recurrent's used EV reports even more essential. 

Who Wins Here?

Without getting too deep into nerdy economics, the biggest beneficiary of used EV tax credits may end up being the seller in each used EV transaction, for at least the next few years. The reason behind that logic is that there's not much elasticity of supply in the used EV market.

In other words, the market can't quickly ramp up supply in response to a lower effective price compared to the increased demand from buyers as a result of that lower effective price. So the impact on sub-$25K used EV prices of this tax credit is, paradoxically, may be a $4000 average increase.

The buyers aren't worse off. They end up paying the same amount as they would have before. But the seller ends up getting more for their EV when they sell. In the end, that flows through to a higher residual value for new EV purchases, so they are more valuable to buy when new.

This whole equation can shift over the course of the 10 year timeframe as used EV supply catches up with demand, but in any case, this policy will be effective in accelerating the EV transition.

New EV Tax Credits

While all attention to this point has been on the used EV portion, there are many substantial changes to the new EV tax credits. While the bill has been heralded as an expansion to the existing incentive scheme since it removes the 200,000 vehicle cap for manufacturers, we did deeper to see who wins and who loses with the new terms. 

In addition to removing the 200,000 vehicle sales cap, allowing Tesla and GM to once again receive the tax credit, other changes include:

  • Credits can be applied at the time of purchase, with the tax offset going directly to the dealer 
  • New MSRP limits on eligible cars ($55K for cars, $80K for trucks)
  • Income limits for households ($150K for single filer, $300K for joint)
  • Final assembly must be in the US

Finally, the most contested part of the legislation, at least from the car manufacturer’s perspective: Critical Mineral and Battery Component Requirements. The new credits are no longer tied to battery size. Instead, a set of complicated and shifting material sourcing requirements are included. 

The Critical Mineral and Battery Component Requirements

There are two clauses that render a vehicle eligible for the new EV credits. Each one is binary and worth $3750. This means that a vehicle may get $7500 off the price, or $3750, or nothing. Here they are verbatim from the text:

‘‘(1) CRITICAL MINERALS REQUIREMENT.—
‘‘(A)The requirement described in this subparagraph with respect to a vehicle is that, with respect to the battery from which the electric motor of such vehicle draws electricity, the percentage of the value of the applicable critical minerals (as defined in section 45X(c)(6)) contained in such battery that were—
‘‘(i) extracted or processed in any country with which the United States has a free trade agreement in effect, or
‘‘(ii) recycled in North America,

…Just joking, it’s a mess of legalese and poor formatting. The takeaway is that any vehicle placed in service before January 1, 2024 must have 40% of its critical minerals sourced or processed in a free-trade agreement country, or recycled in North America. This percentage goes up to 50% in 2024, 60% in 2025, 70% in 2026, and 80% in 2027. 

Similar requirements are made on the percentage of “components contained” in the battery that were “manufactured or assembled in North America.” This quota starts at 50% as of January 1, 2024 and ramps up to 100% by 2028. 

What does this mean? Since the percentage of material that must meet these criteria ramps up over the next five years, companies are going to have to carefully revamp their supply chains and partnerships if they want to be eligible. 

For instance, Tesla, who is known for making the “most American made car,” may run into issues. They rely on CATL to produce the LFP batteries that are being used in their lowest priced cars, the Model 3 and Model Y, which are also the only ones that may be priced for inclusion in the incentive. In order to continue to qualify for these tax incentives, CATL will have to go through with plans to open a North America plant. Similarly, companies like VW, who had already invested in locations in the US for their EVs, will be better positioned to reap the benefits. 

What does this mean today?

As of the date that the Inflation Reduction Act was signed, August 16, 2022, some changes were immediate, and some are delayed until January 1, 2023. For the rest of 2022, the stipulation requiring final assembly be in North America is in effect, which leaves about twenty 2022 EV models that are eligible for the EV tax credit:

  1. EV or PHEV Audi Q5
  2. BMW X5 and 2022/2023 3-Series Plug-in
  3. Ford Mach-E, F-Series, Escape PHEV, and Transit Van
  4. Chrysler Pacifica PHEV,
  5. Jeep Grand Cherokee PHEV and Wrangler PHEV
  6. Lincoln Aviator PHEV and Corsair Plug-in
  7. Lucid Air
  8. 2023 Mercedes EQS
  9. 2022 and 2023 Nissan Leaf
  10. Volvo S60
  11. Rivian, R1S and R1T

Note that until January 1, 2023, the additional requirements are not yet in effect, including the MSRP and income limits. This also means that Tesla and GM are not eligible to receive tax credits until the sales cap is lifted next year, either. The additional requirements that go into effect in 2023 are:

  • Battery sourcing requirements
  • 7 kWh minimum battery

Starting in 2024, an additional two provisions kick in:

  • Battery components cannot be made my a "foreign entity of concern"
  • Credit may be used as a downpayment or deposit on purchase, rather than only as a year-end credit against tax liability

Why the change?

A lot of Biden’s electrification investments have boiled down to competing with China on trade and manufacturing. Although most of the lithium, cobalt, and nickel that passes through China has been sourced elsewhere, China has established itself as the dominant player in the world EV supply, producing around 75% of the world’s materials. Meanwhile, under 10% of the lithium cells in EVs are made in the US. Astute observers have noted the manufacturing and production discrepancy between the two countries and have expressed anxieties that growing EV adoption could bolster China’s economy at the expense of our own. 

From https://t.co/KMucrZhY6z

Senator Manchin, West Virginia senator and longtime climate legislation holdout, explains why he is intractable about the critical minerals and battery component requirements: "Tell (automakers) to get aggressive and make sure that we're extracting in North America, we're processing in North America and we put a line on China…I don't believe that we should be building a transportation mode on the backs of foreign supply chains. I'm not going to do it."

Another component of the new tax credits is a nod to American manufacturing. By requiring final assembly to be in the USA, the act invests in and stimulates our manufacturing sector. The original Built Back Better plan included language about American manufacturing, as well. 

Who wins? Who loses?  

When we think about who comes out on top with this new incentive scheme, we need to consider not just battery components and critical mineral sourcing, but the price cap, as well.

A Reddit user shared a spreadsheet with bets about winners and losers, showing that GM and Tesla come out on top, based on assumptions about current day supply chains and pricing. We translated a portion of it here.

Another analysis puts the number of EVs still eligible under the new plan at a whopping 12, while other estimates say that no one would be qualified under the new rules today. GM, who has been shoring up EV manufacturing and assembly in the US and generally supports the spirit of the bill, concedes that “some of the provisions are challenging and cannot be achieved overnight.” Rivian has also been vocal about their concerns with the new incentives, asking that the “final package must extend the transition period.”

Abby Wulf, director of the Center for Critical Minerals Strategy at the nonprofit Securing America’s Future Energy, called the bill’s mineral content requirements “ambitious” and said that the bill may “help to make automakers realize how serious it is that they can’t just rely on unreliable supply chains.” However, researchers worry that the limits, as set, are unreasonable and will effectively mean that the tax credit is unusable for the near future.  

Even if the final bill sees the transition period extended and the timeline softened, the real winners may be the climate. The benefit to including the battery component and critical mineral stipulation is that it encourages recycling and reuse of EV parts that are quite carbon intensive and politically treacherous to acquire. By building value into recycled components and materials, you force an incentive on an industry that might otherwise fail to develop. As we’ve written elsewhere, producing batteries is an extractive and exploitative process. And lithium ion battery recycling is still a ways away from generating revenue. Whatever its final form, this bill may help.

Additional Federal Support for EV Adoption

The federal government has been working to support the adoption of low and zero emissions vehicles as part of its renewed commitment to lowering national carbon emissions and realigning with the Paris Accord and global climate goals. 

In addition to the Inflation Reduction Act, there has been ongoing funding and legislation for the electrification of passenger transportation. This is a running list of measures this administration has taken: 

  1. Bipartisan Infrastructure Law included many points related to transportation electrification and supporting the infrastructure for an electrified fleet of vehicles. It prioritizes connecting rural and underserved communities to chargers through a network of grants that total $2.5 billion.
  2. A subsidiary program is the National Electric Vehicle Infrastructure (NEVI) Formula Program, which is a joint effort between the Department of Transportation and the Department of Energy. It commits $5 billion to build out a federal charging network by building alternative fuel corridors in every state and enforcing charging standards across the country. States can apply for funding each year. 
  3. The Bipartisan Infrastructure Law also established a Joint Office of Energy and Transportation, uniting the two federal departments. More information on this effort is at https://driveelectric.gov/
  4. CHIPS and Science Act - Funding for scientific research that supports the clean energy transition, and investment to onshore semiconductor production. This includes $200 billion for scientific research, a proposed $80 billion a year to accelerate zero-carbon energy transition, funding to develop and deploy technology that will help catalyze a 50% reduction in global emissions, much of which is still in early prototype stage, $20 billion Directorate for Technology to accelerate technology from prototype to mass market in the US and avoid losing critical technology production to foreign countries, $12 billion in new research & development for the Department of Energy, and additional billions to upgrade federal defense and energy research institutes, including the National Renewable Energy Laboratory, the Princeton Plasma Physics Laboratory, and Berkeley Lab
  5. Department of Energy's EVs4ALL program which has invested $45 million to develop faster charging batteries 
  6. The Joint Office of Transportation and Energy also established the Federal Advisory Committee Act Electric Vehicle Working Group