Inflation Reduction Act – How It Supercharges the Electric Vehicle Industry

Not since the founding of the Environmental Protection Agency in 1970 has the United States government taken such bold action on the environment as it did with the passage and signing of the $370 billion Inflation Reduction Act (IRA) earlier this month. The IRA is arguably the most significant piece of climate legislation in the history of the U.S. What is inarguable is that it is the most significant piece of electric vehicle legislation ever.

Let’s dig into the specifics of what it means for the country, the planet, the EV industry and, perhaps of greatest interest to you, your wallet.

The IRA, which, in addition to its climate-centric provisions, includes important steps to curb healthcare costs, particularly in the form of inflated prescription drug prices, crack down on tax cheats and revitalize U.S. manufacturing (some of which overlaps with the EV-related aspects – more on that in a moment) appeared all but doomed earlier this summer.

However, due to a notable about-face from Senator Joe Manchin of West Virginia, a longtime ally of many corners of the fossil fuel lobby, and some last-minute horse-trading, the slimmest of Democratic majorities – after Elizabeth MacDonough, the nonpartisan Senate parliamentarian, declared that the vast majority of the draft of the bill submitted to her could pass with a simple majority, Vice President Kamala Harris was required to cast the tie-breaking vote – was able to ram it through along party lines.

While not all aspects of the IRA will fully take effect until January 1, 2023, many provisions were codified into law immediately upon President Joseph R. Biden’s signing of the bill into law on August 16, 2022.

How the IRA will help tackle climate change

On a broad level, the IRA enacts the following climate change-mitigation measures which, taken together, put the U.S. on a path to reducing emissions more than 40% below 2005 levels, per a Princeton University analysis of the measure’s impacts:

• expanded tax credits for EVs, batteries, solar panels, and wind turbines
• greater investment in technologies that are either more nascent or have had trouble getting off the ground, including:
  • nuclear fusion, a long-held dream that is just this side of physically impossible but that would simultaneously be far safer and more powerful than the nuclear fission approach that’s been used to date
  • carbon sequestration (capture and storage, i.e.)
  • so-called “clean hydrogen,” including incentives for both its manufacture through less emissive processes (it has heretofore primarily been created using natural gas, which often comes from “fracking”) and for the purchase of vehicles – not only passenger cars such as the Toyota Mirai but commercial trucks and vans
  • electric heat pumps, which could help alleviate emissions from manufacturing facilities and other commercial structures

The development of these technologies and approaches, wherever they fall on the maturity scale – and, make no mistake, none are anywhere near as far along as the oil and coal extraction, which go back hundreds and thousand of years, respectively, helping to explain in part why the transition to cleaner energy has been so difficult – will have knock-on effects far beyond U.S. borders. Not only will other countries be able to harness many if not all of the technical advancements emanating from the United States, on a psychological level, this striking level of action could inspire – or, looked at another way, goad – other countries to do more.

Impacts on the electric vehicle ecosystem

As much as the provisions of the bill pertaining to clean energy can do to combat climate change, it is not without reason that the aspects relating to the utilization of energy generally, and the increased use of electric vehicles in particular, has captured the public’s imagination. Of course, this has been the case with EVs for well over a decade now. One need look no further for evidence than the list of the world’s richest people, which is topped by an EV magnate. While this isn’t scientific proof of the public’s interest in EVs, per se, it’s hard to imagine it could be a coincidence.

With that said, zeroing in on the electric vehicle ecosystem in particular, highlights of the Inflation Reduction Act include:

• as detailed on the U.S. Department of Energy’s Alternative Fuels Data Center, “The Inflation Reduction Act of 2022 (Public Law 117-169) amends the Qualified Plug-in Electric Drive Motor Vehicle Credit (IRC 30D), now known as the Clean Vehicle Credit, and adds a new requirement for final assembly in North America that takes effect on August 16, 2022” 
• even before this type of climate change mitigation legislation was a glimmer in Joe Biden’s eye, and certainly before it appeared dead in the water earlier this summer, many EV makers were already moving to expand their U.S. manufacturing operations, primarily due to a) the rising popularity of EVs and b) to guard against the kinds of challenges and risks in the international supply chain that have been one of the hallmarks of pandemic-era production; select specific plans include:
  • Ford, which announced in June of this year that it would invest $3.7 billion to add more than 6,000 union jobs at plants across Michigan, Ohio, and Missouri, all part of Ford’s plan to up its EV sales numbers to 2 million a year, worldwide, by the end of 2026
  • Hyundai, which announced this May that it would build its first-ever dedicated EV plant in the state of Georgia and, to capitalize on the North American final assembly requirement in the newly-passed IRA, just revealed it was mulling moving the groundbreaking on the facility from the original target of 2023 to before the end of this year
  • Tesla just opened its new Austin, Texas factory in April 
  • Volkswagen, which was the top-selling car company in the world as recently as 2020, announced in June 2022 that it was “actively in the process of looking at another production facility and also looking at a battery facility,” then began production of its first U.S.-made EV at its plant in Tennessee the next month
  • Honda announced just days ago that it has struck a deal with Korean battery giant LG Energy Solution to build a $4.4 billion US factory to supply its electric vehicles. The partners have not announced the factory location yet, but plan to begin construction in early 2023.
• $3 billion in long-desired (and, to this author’s mind, sorely needed) enhancements to the United States Postal Service’s fleet electrification efforts: $1.29 billion for the purchase of zero-emission vehicles and $1.71 billion for supporting charging infrastructure
• an additional $3 billion in funding to the Department of Energy’s Advanced Technology Vehicles Manufacturing Direct Loan Program (ATVM), the advent of which dates all the way back to 2007
• $2 billion for the Domestic Manufacturing Conversion Grant program, which “encourage[s] domestic production and sales of efficient hybrid and advanced diesel vehicles and components of those vehicles”

And what about changes to the EV tax credit?

Taking an even more granular view, changes to the longtime $7,500 EV tax credit are welcome, but quite complex. They include, at the broadest level:

• a renewal of the federal $7,500 tax credit, which was set to expire at this end of this year, for another full decade
• critically, the ability to receive the $7,500 credit on EV purchases at the point of sale, rather than having to wait to claim it on one’s yearly federal income tax filing (the credit for leases rather than purchases has always been immediately available, so perhaps this change will betoken a shift toward a greater number of purchases versus leases)
• a lifting of the cap on the number of times an automaker’s customers are eligible for this $7,500 federal subsidy before it is phased out and ultimately eliminated
  • Toyota just joined Tesla and GM as “victims of their own success” in hitting the 200,000 threshold for rebates to be phased out over a one-year period after which, under the pre-IRA regime, no further rebates can be earned

Depending on your perspective, either the devil or God is in the details, as the twin expressions go. That’s to say, there are a number of potentially dealbreaking nuances within the above-listed changes. For example:

• beyond the North American final assembly requirement we went into earlier, the majority of battery components need to come from North America, plus
• a certain percentage of “critical minerals” must come from North America or countries with free trade agreements with the US
• if they can meet these strictures, Tesla, GM, and Toyota are back in the rebate game! (The question of when they will meet them is another matter)
• EVs above a certain price ($55,000 for sedans and $80,000 for SUVs, pickups and vans) won’t qualify, even if other tests are met, leaving only about a dozen EVs eligible for the credit at today’s prices
• The income cap returns, although now with much lower limits—individuals buying a new EV with an adjusted gross income (AGI) of more than $150,000, heads of households with an AGI of more than $225,000, or joint filers with an AGI of more than $300,000 would not qualify any longer.

Last on the tax credit front, but certainly not least, for the first time ever, used vehicles are now eligible for rebates, to the tune of $4,000 each. The potential impact of this can’t be overstated. While the following caveats apply (you knew it wouldn’t be that simple, didn’t you?), this is undeniably a victory for advocates of equity and access in the electric vehicle space, of which EVmatch has long been a leading proponent:

• only the first time they’re resold
• only when by car dealers, not private parties
• only when the price of the used EV is $25,000 or less
• technically, the rebate is up to $4,000; otherwise, it’s 30 percent of the purchase price
• for used EVs, the income caps are at $75,000 for individuals, $112,500 for the head of a household, and $150,000 for joint filers.

Hitting closest to home for EVmatch, there are a number of important and exciting improvements to the charging landscape, headlined by these:

• the federal tax credit on charging equipment has been extended through 2032
• for individual/residential uses, the tax credit remains as it has been (30%, up to $1,000)
• for commercial uses, the tax credit stays at 6% but now with a much higher maximum credit of $100,000 per unit (up from $30,000 per property before)
  • the fine print here – namely, that the equipment must be housed in a low-income community or non-urban area – represents another major win for access and equity

With thanks to you for having taken the time to read this far, all this having been said, I’d be remiss if I didn’t wrap up this blog post on an unabashedly positive and optimistic note. As evidence of the psychological “halo effect” mentioned earlier, the IRA’s announcement of the United States having “rejoined the party” on climate change mitigation and reversal after decades of leadership from elsewhere – primarily Europe – we can already see green shoots of bold actions that may have been inspired by, or at least given “air cover” by, the IRA’s example:

• the California Air Resources Board (CARB) voted to ban the sale of gas-powered vehicles by 2035, with aggressive reduction targets as milestones as the interim – and, per the New York Times, far from having to drag automakers along kicking and screaming, as was usually the case in the past with such mandates, “[Found] a Receptive Auto Industry”
• Jay Inslee, governor of the state of Washington, explicitly announced that his state would follow California’s lead on the 2035 ban deadline, and another 12 states have typically stayed in lockstep with California on auto emissions standards
• half a world away, the Chinese island of Hainan announced it would ban sales of fossil fuel-powered vehicles a full five years earlier, by 2030

Some pundits have said that the landmark 2015 Paris Accord international treaty on climate change, which the U.S. rejoined on President Joe Biden’s first day in office, didn’t go far enough. The IRA certainly could have turned out even better, too. Still, this is a time for celebration…however short a time said celebration should last before we all roll up our sleeves and begin the work of parlaying the gains in this legislative victory, as Al Gore said in a webinar from his Climate Reality Project on the IRA’s impacts.

In the real world of messy dealmaking and stomaching tradeoffs such that we “not let the perfect be the enemy of the good,” to paraphrase Voltaire, the IRA is nothing short of a triumph. Put another way, to borrow a metaphor from the fundamental physics of energy, it’s a quantum leap.