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The Biden administration has moved to choke off China’s role in the US’s electric vehicle supply chain with rules that critics allege will slow the transition from petrol-fuelled cars.
The US Treasury announced on Friday that from next month no US-manufactured EVs that include Chinese-made battery components will be eligible for the full subsidies offered by President Joe Biden’s $369bn landmark climate law.
Nor will EVs qualify for the Inflation Reduction Act incentives if they are made by companies with significant ties to the Chinese government or produced with a licensing agreement with a China-based or Beijing-controlled operator.
“With this guidance and the clarity that it will provide, we’re ensuring that the US electric vehicle future will be made in America,” said John Podesta, Biden’s top clean energy adviser.
The rules come after Biden met Chinese President Xi Jinping last month in a bid to ease tensions between the world’s two largest economies.
At present, Podesta said: “China still dominates the supply chains for key technologies . . . they completely outpace the US and our allies on the production of batteries and their components.”
As well as dominating EV and battery production, China processes more than half the world’s lithium, cobalt and graphite, which are crucial inputs.
The new rules are expected to reduce how many car models qualify for the full IRA tax credit of $7,500 per vehicle in the near term.
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The Alliance for Automotive Innovation, which represents car and battery makers in the US, has already warned against tightening the conditions for the subsidies.
It said that even before the rules were announced only about a fifth of EVs on sale in the US were eligible for full tax credits, adding that stricter rules would disqualify even more vehicles.
“Policymakers shouldn’t be surprised if the number of eligible vehicles further drops. That’s not a good development for consumers,” said John Bozzella, the alliance’s chief executive.
Carmakers will have a two-year transition period to adapt to regulations for smaller battery parts.
The Biden administration is trying to walk a fine line ahead of next year’s election between its efforts to electrify the economy to cut emissions and its drive to create jobs and compete with China.
The administration has set a 2030 target for EVs to represent 50 per cent of all new vehicle sales.
“If you’re trying to source all of the components of an EV without drawing on any Chinese content . . . it’s going to be logistically more challenging and likely a more expensive product at this moment in time,” said Eli Hinckley, partner at Baker Botts. “It’s not a 2024 exercise. This is multi years of building out a supply chain.”
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Climate groups also argued that a strict interpretation of the law would make the US EV rollout more expensive.
Zach Friedman, federal policy director at Ceres, a non-profit organisation focused on sustainability, said US-Chinese collaboration “can play a key role in lowering the upfront costs of electric vehicles”.
In a letter to the Treasury department during the consultation period, he added that such co-operation could also “vastly improve consumer accessibility, and significantly improve the environmental footprint of EV batteries”.
The US has seen a rush in EV supply chain investment since the IRA was passed by Congress last year. But many projects are not expected to come online until the second half of the decade. US carmakers including Ford, General Motors and Tesla have delayed their factory ambitions due to a slowdown in demand.
Domestic manufacturing and energy security advocates are likely to cheer the tighter rules announced on Friday. They include West Virginia senator Joe Manchin, who wrote a letter to Treasury secretary Janet Yellen last month urging her to employ “the strictest metrics possible”.
“If we are serious about developing a domestic battery supply chain, then we should take a fairly strict reading of the law,” said Gene Berdichevsky, co-founder of battery materials start-up Sila, which broke ground on construction of its first large-scale factory in Washington on Wednesday.
