The Biden administration on Friday proposed new rules aimed at moving more production of electric vehicle batteries and the materials that power them to the United States, building a strategic industry now dominated by China.
The rules are intended to limit the role of Chinese companies in supplying materials for electric vehicles that qualify for federal tax credits. They will also bar companies seeking federal funding to build battery factories in the U.S. from sourcing materials from Chinese partners.
The rules could cause some consternation among automakers, which continue to rely heavily on China for electric vehicle materials and components. They are also under intense cost pressure as they try to convert their factories to make electric cars, and China has some of the most advanced and cheapest battery technology in the world.
The Biden administration is trying to use billions of dollars in new federal funding with carrots and sticks to change this dynamic and build a U.S. electric vehicle supply chain.
The climate law signed by President Biden in 2022 provides tax credits of up to $7,500 for consumers who buy American-made electric vehicles that use mostly domestic materials. The law also included a general ban on Chinese products. Lawmakers have ordered companies in China, Russia, North Korea and Iran to be banned from providing certain materials for cars that receive these tax breaks.
But the law left several questions unanswered, including what constitutes a Chinese or Russian company. Administration officials said these definitions include any company incorporated or based in China or Russia, as well as any company where 25 percent of the board seats or equity shares are owned by Chinese or Russian governments.
The law also requires battery manufacturers that enter into contracts or licensing agreements with Chinese companies to ensure that they retain certain rights to their projects. This provision is intended to ensure that a Chinese company does not actually have control over such a project.
Some conservative lawmakers had challenged Ford Motor's plans to license technology from Chinese battery giant CATL for a plant in Marshall, Michigan, arguing that such a partnership should not be eligible for federal tax credits.
In a letter to the administration in November, Sen. Joe Manchin III, Democrat of West Virginia, called on the Treasury Department to adopt “the strictest possible standards” to exclude Chinese companies from stimulus programs.
The rules will apply to battery components in 2024 and to critical minerals such as lithium, cobalt and nickel in 2025. They will remain open to public comment for several weeks and may be adjusted based on industry opinion.
The rules could have a profound impact on the U.S. electric vehicle market, which is growing rapidly — battery-powered vehicles accounted for about 8 percent of new cars sold in the third quarter. Car and battery makers said Friday morning that they were still reviewing the 62 pages of rules published by the administration and that it would take time to determine how many models would be eligible for tax credits.
John Bozella, executive director of the Alliance for Automotive Innovation, wrote in a blog post Friday morning that the rules had struck “a pragmatic balance,” including by exempting trace materials. If the government had banned all smaller Chinese parts from the supply chain, no car model might have been eligible for tax credits next year, he said.
Many cars have already been excluded from purchase credit by other rules, such as the requirement that cars be assembled in North America. Currently, only about 20 vehicles qualify for the program out of more than 100 electric vehicles sold in the United States.
The rules also raise new questions about whether stricter supply chain requirements could continue a trend that is leading more buyers to lease rather than purchase vehicles.
The ban on sourcing from China only applies to vehicles sold, not leased vehicles. Consumers can receive tax credits for electric vehicles they lease from car dealers, which has led to a boom in electric vehicle leasing. Jack Fitzgerald, founder of Fitzgerald Auto Malls, which operates dealerships in Florida, Maryland and Pennsylvania, said there has been an increase in customers leasing electric vehicles. However, he said concerns about EV range and charger availability, more than price, are holding back EV sales.
“That’s the most important thing,” Mr. Fitzgerald said.
Automotive industry lobbyists have warned that extremely strict rules could curb sales of electric vehicles and have called on the government to strike more trade deals to ensure supplies of scarce battery minerals. But Paul Jacobson, General Motors' chief financial officer, said the company has structured its electric vehicle operations to succeed regardless of federal regulations.
“We're not anchoring the deal on saying this has to happen” when it comes to regulations, Mr. Jacobson told reporters on Thursday. If the regulations change, he added, “it won’t be backbreaking for us.”
The government said it would offer some temporary exemptions through 2026 to strict procurement requirements for lower-value components of batteries that are now difficult for automakers to track.
Wally Adeyemo, the deputy secretary of the Treasury Department, said in a briefing with reporters that the rules would help advance the administration's goals of building an American clean energy supply chain while reducing emissions in the transportation sector.
“Automakers have already adjusted their supply chains to ensure buyers are eligible for these credits,” he said. “These changes take time, but companies are investing and Americans are buying these cars.”
According to the Rhodium Group and the Center for Energy and Environmental Policy Research, companies invested $213 billion in the production and deployment of clean energy, clean vehicles, building electrification and carbon management technology in the United States last year in Massachusetts Institute of Technology. This is an increase of 37 percent compared to the previous year.
Companies are also investing in factories and technology to develop the materials needed for batteries and other electric vehicle components, including in North Carolina, where several companies are trying to revive the lithium industry.
Still, the global electric vehicle industry remains heavily anchored in China, the world's largest manufacturer and exporter of electric vehicles. China produces about two-thirds of the world's battery cells and refines most of the minerals critical to powering an electric vehicle.
John Podesta, a senior White House clean energy adviser, said Wednesday that China processes much of the world's lithium and cobalt, as well as nearly 90 percent of the world's graphite, “and they completely outpace the United States and our allies in the production of batteries and accumulators.” “outperform their constituent parts.” But because of the government’s investments, he said, “we are rewriting that history.”
China's dominance in supply chains for critical minerals has raised concerns that Beijing could cut off the United States from materials crucial not only to cars but also aircraft engines and ammunition.
Others raised concerns about poor working conditions, the use of child labor and poor environmental performance of critical mineral supply chains that run through countries such as the Democratic Republic of Congo and Indonesia.
Companies building mining, refining and battery construction operations in the United States and allied countries would have to meet much higher labor and environmental standards – and meeting those requirements would come at a cost, said Bryce Crocker, the chief executive of Australian mining company Jervois.
Jervois built the United States' only cobalt mine in Idaho. But the company paused construction in March after the global price of cobalt plummeted. Mr Crocker attributed the collapse to a flood of cobalt produced by Chinese companies that had been heavily subsidized by the state.
Mr Crocker said on Thursday that Treasury rules could impact his business but that it was awaiting government guidance.
Battery makers in Japan and South Korea have also faced the rules because their supply chains are often closely intertwined with China's.
The rules also appear to ban automakers from sourcing the nickel used in their batteries from Russia, one of the world's largest nickel producers.
One of the challenges for car manufacturers will be to develop systems that allow them to track all the components of their battery across a long and often opaque supply chain.
Todd Malan, the chief external affairs officer of Talon Metals, which is seeking approval for a nickel mine in Minnesota, said strict rules could help prevent “mineral laundering” schemes in which Chinese or Russian minerals flow through facilities in friendlier countries would be directed.
The rules would need to be enforced through audits and clawbacks of bonuses when companies violate them, and companies would also need to introduce “know your supplier” systems that could track inputs from the mines to recycling programs, Mr. Malan said.
In its announcement, the Treasury Department said vehicles that were misreported would be deducted from an automaker's eligibility for tax credits, and that automakers that committed fraud or willfully ignored the rules could be declared ineligible for the tax credit in the future.
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