President Biden signed into law legislation that will reshape the tax incentives associated with EV production and sales in the USA. While established players such as Tesla now become eligible again, all manufacturers will now have to show ‘domestic’ sourcing of key components and materials to qualify.

One perhaps unexpected consequence of the signing of the bill is that the last few weeks and months have seen US EV manufacturers pushing sales through ahead of the new restrictions in order to qualify for the old incentives. Expect to see a summer bounce in US EV sales.

As well as allowing the likes of Tesla and GM to re-engage with the incentives after lifting the 200,000 sales cap per manufacturer that formed part of the previous scheme, the key structural change will be the linking of incentives to the sourcing of key EV components and materials. The new credit system will continue to offer a maximum incentive of US$7,500, but to qualify an EV manufacturer will need to assemble the vehicle in the USA as well as source or process battery metals domestically or through a country that has a free trade deal with the US. Most critically, China does not qualify as an approved source of raw or processed battery materials.

As a consequence of the new legislation, around 70% of all EV vehicles sold in the US have become disqualified from the incentives overnight. Shifting key supply chains away from a reliance on China is a key policy goal for the current administration in the USA. It will continue to be presented as part of a net zero, clean energy suite of measures. However, the short-term impact on the adoption of clean energy EVs is likely to be somewhat negative while manufacturers scramble to meet the new criteria and suffer the impact of reduced incentives on their short-term sales through the remainder of 2022 and beyond.