Clean Energy Drive: U.S. Initiatives for Reshoring Electric Vehicles and Battery Supply Chains

In an effort to enhance the security of the U.S. supply chain, starting from 2024, eligible clean energy vehicles must not contain any battery components manufactured or assembled by Foreign Entities of Concern (FEOC). Furthermore, beginning in 2025, eligible clean energy vehicles must not contain any key minerals extracted, processed, or recycled by FEOC.

On December 1st, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued proposed guidance on the Clean Energy Vehicle provisions of the Inflation Reduction Act (IRA), aimed at reducing consumer costs, stimulating U.S. manufacturing prosperity, and strengthening energy security by establishing resilient supply chains with allies and partners. Since the enactment of IRA, the U.S. private sector has announced investments of nearly $100 billion in clean energy vehicles and battery supply chains.

The Notice of Proposed Rulemaking (NRPM) released on the same day outlines the requirements for Foreign Entities of Concern (FEOC). To bolster the security of the U.S. supply chain, eligible clean energy vehicles must not contain any battery components manufactured or assembled by FEOC starting in 2024, and from 2025, they must not contain any key minerals extracted, processed, or recycled by FEOC. On April 12th of this year, the U.S. Department of Energy (DOE) suggested interpreting “Foreign Entity” as:

• (i) a foreign government;
• (ii) a natural person who is not a U.S. lawful permanent resident, U.S. citizen, or any other protected individual as defined in Title 8, Volume 1324b(A)(3) of the U.S. Code;
• (iii) entities organized under foreign law, associations, companies, organizations, or combinations of individuals whose principal place of business is outside the United States;
• (iv) entities organized under U.S. law, owned, controlled, or subject to the direction of entities qualifying as Foreign Entities under (i)-(iii) (as interpreted in Section 4).

In addition to FEOC requirements, clean energy vehicles must continue to meet other statutory standards, including additional procurement requirements for critical minerals and battery components, requirements for final assembly in the U.S., and a manufacturer’s suggested retail price not exceeding $80,000 for trucks, SUVs, or vans and $55,000 for other vehicles.

Requirements for Foreign Entities

The NPRM provides proposed rules to determine whether applicable key minerals (and their associated component materials) and battery components are produced or assembled by FEOC for battery components, and extracted, processed, or recycled by FEOC for key minerals. The proposed rules will require manufacturers to conduct due diligence to comply with industry standards for battery material traceability.

According to the proposal, FEOC compliance for battery components will be determined at the time of manufacture or assembly, while FEOC compliance for key minerals will be determined by reviewing all stages of the relevant key minerals’ extraction, processing, and recycling. For instance, minerals extracted by non-FEOC entities but processed by FEOC entities would be non-compliant. Battery components meeting FEOC standards must trace back to battery cells meeting FEOC standards, and battery cells cannot be manufactured or assembled by FEOC.

Tracking of key minerals is generally required as well. However, considering the complexities in the supply chain, where specific minerals for certain batteries may be challenging to track, the NPRM calls for comments on a temporary transitional rule. Under this rule, key minerals and associated component materials can be assigned to specific sets of battery cells. Subsequently, physical tracking of batteries and new clean energy vehicles must be done using serial numbers or other identification systems.

The NPRM also proposes a temporary transitional rule until 2026, providing the industry time to establish traceability standards for these lower-value materials. Comments are sought on the necessity and design of this rule, including which materials should be included and whether alternative approaches to this transitional rule are more appropriate.

To allow eligible vehicles already in dealer lots and currently in production to qualify for credits while the rulemaking process continues, the proposed rules will provide a transitional rule to expedite certification for new clean energy vehicles without battery components manufactured or assembled by FEOC and put into service between January 1, 2024, and 30 days after the finalization of the rules.

The proposed rules will also establish a pre-review system starting from 2025, providing additional oversight for FEOC compliance and certainty for manufacturers. For new vehicles put into service in 2025 or later, the IRS will track FEOC compliance through a ledger of compliant battery classifications. Annually, automakers will need to submit estimates and supporting documents to the IRS for the expected quantity of batteries meeting FEOC standards that they plan to purchase each year, for review by the U.S. Department of Energy. Automakers’ balances will be adjusted based on changes in the expected quantity of batteries meeting FEOC standards, and credits for new clean energy vehicles meeting FEOC conditions will decrease as reported to the IRS. Once the ledger reaches zero within a year, automakers cannot submit vehicles eligible for the clean energy vehicle credit under Section 30D.

Finally, the NPRM proposes a system to incentivize automakers to comply with the regulations. Inadvertent errors can be corrected; otherwise, vehicles associated with errors will no longer be eligible for credits. If these vehicles have already been sold, the error will lead to a reduction in the ledger.

According to the proposed enforcement framework, in cases of fraud or intentional disregard of the rules, all unsold vehicles by an automaker may no longer qualify for Section 30D credits. The IRS may also terminate the eligibility of the automaker for future additional vehicle credits. The U.S. Department of the Treasury and the IRS will carefully consider public comments before issuing the final rules.

Requirements for Battery Components

To meet the requirements for battery components and qualify for a $3,750 tax credit, the following criteria for battery components manufactured or assembled in the U.S. are established:

• 2023: Percentage must be 50%.
• 2024 and 2025: Percentage must be 60%.
• 2026: Percentage must be 70%.
• 2027: Percentage must be 80%.
• 2028: Percentage must be 90%.
• Starting from 2029: Percentage must be 100%.

Requirements for Key Minerals

To meet the requirements for key minerals and qualify for a $3,750 tax credit, the following criteria for key minerals extracted or processed in the U.S. or countries under free trade agreements, or recovered in the U.S. from batteries are established – as stipulated by the Inflation Reduction Act:

• 2023: Percentage must be 40%.
• 2024: Percentage must be 50%.
• 2025: Percentage must be 60%.
• 2026: Percentage must be 70%.
• Starting from 2027: Percentage must be 80%.

Starting from 2024, eligible clean energy vehicles must not contain any battery components manufactured by foreign entities, and starting from 2025, eligible clean energy vehicles must not contain any key minerals extracted, processed, or recycled by foreign entities.