The good news for Canada’s auto industry is that Canadian-built electric vehicles could one day be eligible for a $7,500 tax credit under the landmark climate bill that US President Joe Biden is expected to enact later this week and the Buy American is scrapping provisions of an earlier bill that failed to pass Congress.
The bad news is that the procurement requirements in the Inflation Reduction Act, which passed the US Senate on Sunday thanks to a landmark vote by Vice President Kamala Harris and is due to be voted on Friday in the House of Representatives, are so restrictive that few electric vehicles currently are on the market or are to be produced in the next few years could meet them.
An analysis by the US Congressional Budget Office put the value of EV tax credits at just $85 million in 2023, meaning only about 11,000 EVs will qualify for the full $7,500 next year. The cost of the tax credits would increase to $1.4 billion by 2031, equivalent to about 190,000 electric vehicles. For comparison, total auto sales in the US reached 14.9 million vehicles in 2021. Electric vehicles and plug-in hybrids accounted for 608,000, or about 4 percent of the total.
So the Inflation Reduction Act doesn’t appear to be the turning point that North American auto industry executives were hoping for. The bill requires that 40 percent of critical minerals and 50 percent of components used in EV batteries must originate in the United States or a U.S. trading partner by 2024 to qualify for the full $7,500 credit. dollars to qualify. The critical minerals threshold would increase to 80 percent by 2027, while 100 percent of battery components for electric vehicles would need to be sourced from North America by 2028.
The Inflation Mitigation Act also specifically excludes from eligibility any electric vehicle manufactured with critical minerals and components extracted, processed or recycled by a “foreign company of concern.” This provision is aimed squarely at China, which dominates the electric vehicle supply chain.
Threat to Canada’s electric vehicle industry dissipates with US Senate deal
West Virginia Democratic Senator Joe Manchin, who blocked Mr. Biden’s Build Back Better bill earlier this year, had made it clear he would not support tax credits for electric vehicles assembled in North America with Chinese minerals and components. And he used his influence to the maximum, winning concessions for his mining-dependent state.
“Right now we’re almost ready to put all our eggs in one basket because we think EVs are the way to go, and we’re going to be absolutely exploited, to the point where we’re going to be from the foreign supply chain that is China.” held hostage,” Mr Manchin said in June. “I just can’t believe we are even thinking of going down this path and I will do whatever it takes to stop it. Because I think it’s stupid.”
He may have been right about that. But the recent tax credits, worth about $7.5 billion for newly purchased EVs over the next decade, probably won’t be enough to accelerate efforts to build an all-North American EV supply chain. It is likely that much larger incentives and subsidies will be required to boost production on this continent.
Policymakers also need to streamline the permitting process for new mines. Opposition from environmentalists has already stalled or delayed several proposed lithium mining projects in the United States. In Canada, there has been more talk than action when it comes to developing a critical minerals strategy. In addition, the higher costs associated with sourcing and processing critical minerals in North America could make electric vehicles, already about 20 percent more expensive than gas-powered cars, prohibitively expensive for most consumers.
Much will depend on future gasoline prices. Data from auto shopping website Edmunds showed that US consumer interest in electric vehicles increased as gasoline prices rose in the first quarter of 2022, but stagnated in subsequent months as consumers adjusted to higher prices at the pump. When gasoline prices started falling in late June, so did interest in electric vehicles.
In the days leading up to the Senate vote, US and foreign automakers have been lobbying to water down EV tax credit rules. General Motors, which has announced plans to go all-electric by 2035, called the bill’s provisions “challenging” and warned they “could not be achieved overnight.”
While GM delivered 582,000 vehicles to the United States in the second quarter of this year, only 7,217 were plug-in electric vehicles, accounting for just 1.7 percent of GM’s total deliveries. The automaker announced last week that it had “entered into three new procurement agreements for electric vehicle battery materials” through 2030, which would support its goal of producing one million electric vehicles per year. However, no information was given on the geographical origin of these materials.
While the Canadian auto industry owes Mr. Manchin a big “thank you” for leveling the playing field for electric vehicles in North America, other provisions in the Inflation Reduction Act are not so favorable to Canada. The bill provides billions of dollars in grants and loans to allow automakers to build or remodel electric vehicle manufacturing facilities in the United States. The governments here must do the same.
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