Senate improves EV tax credit in largest climate bill ever

The Senate has voted to pass the Inflation Reduction Act, which includes nearly $400 billion over 10 years in funding for climate and energy related programs, and an extension and improvement of the US electric car tax credit.

Update: Since many EVs may lose access to tax credits within a week or so, we’ve posted an article to help you find out how best to navigate these changes for most affected EVs in the US.

Major Update: The bill has been signed. It is now law.

The bill passed with a vote of 51-50, with all Democrats supporting and all republicans opposed and Vice President Kamala Harris acting as the tiebreaker vote. The bill now goes on to the House, where it is expected to pass within the week (update: it did), and then to President Biden’s desk.

The Inflation Reduction Act is a trimmed-down and rebranded version of the original Build Back Better proposal, which stalled in the Senate due to objections from all republicans and Democrat Joe Manchin. After much negotiation, Manchin finally agreed to a version of the bill that would allow it to pass despite republican opposition to necessary climate measures.

The bill primarily focuses on climate issues, but also includes significant corporate tax and prescription drug and healthcare benefits partially intended to chill inflation over the next decade. The climate portion of the bill represents $369 billion in spending, down from the $550 billion in the original Build Back Better proposal. Due to a corporate minimum tax provision, the bill will reduce the deficit by around $300 billion over ten years.

Analyses show that the investments in the bill could put the US on target to reduce emissions between 31-44% (below 2005 levels) by 2030. President Biden’s goal was to put the US on target for a 50% reduction by 2030, so this bill falls short of that goal, but brings us closer to the mark.

This climate spending includes $60 billion for solar panel and wind turbine manufacturing (and $30 billion in credits for new projects), $60 billion for disadvantaged communities that bear the brunt of climate impacts, $27 billion for clean tech R&D, $20 billion to reduce agricultural emissions, $5 billion for forest conservation, $4 billion for drought funding in Western states, new battery manufacturing credits and many more climate-related priorities.

Some of this funding will go to carbon capture, which is likely to be necessary to reduce atmospheric CO2 concentration, but is also treated with some skepticism by climate advocates as a method of oil industry greenwashing.

It also imposes fees on excessive methane emissions, which falls short of being a carbon price but is nevertheless a good step forward in reducing emissions of this potent greenhouse gas.

Then there are several credits for home improvements, including heat pumps, induction stoves, electrical service upgrades, home battery storage, extension of the rooftop solar credit, and, of course, the electric car tax credit.

Electric vehicle tax credit

The main portion of the bill our readers will be interested in is the $7,500 electric vehicle tax credit, which is renewed starting in January 2023 and will last a decade – until the end of 2032.

The previous tax credit had a cap of 200,000 cars per manufacturer, a limit that Tesla and GM surpassed years ago, and Toyota just exceeded this quarter. Other manufacturers (Ford, Nissan) were on track to surpass that number very soon, making this a timely change in the credit.

The new credit makes quite a few changes, the largest of which is to remove that cap at the start of 2023. Now, all manufacturers have access to unlimited credits as long as they fulfill the other requirements of the bill. Also, the credit can be applied upfront at the point of sale if purchased from a dealer, rather than needing to file for it on your taxes in the following April – a welcome change that is long overdue.

New requirements include that the cars must be assembled in North America and that materials and “critical minerals” in the battery must come from the US or a country with a free trade agreement with the US. These requirements are intended to spur domestic manufacturing and more diverse supply chains for EV materials, which are currently heavily reliant on one country.

This means that we will have to wait to see which vehicles qualify for the new credit, depending on the specifics of how these thresholds are counted (and the thresholds increase year-by-year, so some cars might qualify one year and not the next). The government will release these guidelines by the end of the year.

Further, vehicles must have an MSRP of under $55K for cars and $80K for SUVs, trucks and vans, otherwise they don’t count, leaving out several Tesla configurations and trucks like the USA-made Rivian. And buyers can only take advantage of the credit if they make under $150K a year ($300k filing jointly) – which will likely affect some of these higher-end car buyers.

The new credit is further available to commercial buyers, with separate qualifications and limits.

There is also a provision that allows usage of the previous credit on a car delivered after the bill is enacted if there is a binding purchase order signed in 2022 before President Biden signs the bill, which should happen in the next week or two.

It will even be available on used EVs, with a credit of up to $4,000 on cars priced $25K or less, and subject to a number of other requirements (including a lower income cap of 75k/150k).

All of this applies additionally to plug-in hybrids as long as they fulfill the same requirements and have a battery over 7kWh. The previous credit also applied to PHEVs depending on battery size, now they get the full credit as long as they are over the 7kWh threshold.

The upshot of all this is:

• If you have a signed purchase order or sign one before Biden signs the bill (i.e., this week) and then have to wait for delivery of an EV assembled outside of North America, you can still qualify for the current credit.
• If you buy an EV assembled outside of North America after the bill is enacted but before the end of the year, you may not get the current credit as the final assembly requirement goes into effect at enactment, but the mineral and battery materials requirements go into effect next year. So see if you can get a signed purchase agreement before the bill is signed (i.e., this week).
• If you’re buying a car that doesn’t qualify for the current credit due to the manufacturer being over the cap, you may get the new credit by waiting until next year, depending on whether the car qualifies under the new manufacturing and MSRP rules (e.g., a Chevy Bolt, but not a Tesla Model S).
• We don’t yet know exactly which cars will qualify for how much credit (though here’s Reddit’s guesses on the matter), and the government will release guidance to clarify that before the end of the year.
• If you’re buying a low-priced used EV, you might be able to save thousands of dollars if you wait until January.
• All of this is hard to predict given the current status of the auto market, with both new and used cars being supply-constrained, and especially EVs, and with manufacturers building new EV factories.

(Update: This article previously said that the credit would remain unchanged this year, but while much of the bill takes effect next year, the domestic assembly requirement goes into effect immediately upon enactment of the bill, so foreign-made EVs will need a signed purchase order before that time in order to qualify for the current credit)

Update 2: Since many EVs may lose access to tax credits within a week or so, we’ve posted an article to help you find out how best to navigate these changes for most affected EVs in the US.

Electrek’s Take

Finally, we’ve seen significant action on the biggest problem humanity has ever caused – and a long-needed reform of the electric car tax credit that solves several of the annoyances we’ve had to deal with for more than a decade.

The availability of EV credits on used vehicles, application at the point of sale, and finally pushing to make its availability progressive instead of regressive (that is, available to low-earners rather than higher ones), are all great steps forward. Some of the new requirements are still complicated and may leave some buyers out of luck, but overall this should make the process easier and more accessible for EV buyers.

And the other climate measures in the bill are welcome and necessary.

That said, for those of us who have our heads deep into the problems of climate change, this has to be just the beginning. There is much more work that needs to be done, and we need an order of magnitude more funding in order to do it.

A recent study found that the world could shift to entirely renewable energy at a cost of $62 trillion. This seems like a high number, but the study also found that this cost would be recouped in just six years with savings in environmental, health, and energy costs.

Given that the US is ~15% of world GDP and government spending accounts for ~30% of US GDP, this suggests that the US government should be responsible for an order of magnitude more cost than this bill covers – about $3 trillion (or more, if the rest of the economy doesn’t invest their ~$7 trillion share).

There are also a few worrisome portions of this bill, such as leasing provisions for oil & gas projects and an agreement to reform permitting that may make fossil fuel projects easier (which Manchin wanted in return for his support of this bill). These could dent the progress made by the bill, especially since it is paramount that we keep oil in the ground as every gallon extracted will eventually have to be removed from the atmosphere at significant cost.

But overall, we’ve gotten so used to governmental inaction on climate – particularly driven by the minority republican party that increasingly opposes environmental progress that a majority of Americans support – that this step forward represents a huge relief and a shot in the arm for all climate advocates that our work has not been in vain and that something can be done to move the needle and perhaps solve this problem we humans are causing.

What we need to do after this is not sit on our laurels being happy that the bill was passed, but take this as a sign that we can work together on these issues, that we can get things done. And, importantly, as a clear signal of which party is unanimously hostile to solutions to the largest problem humanity has ever caused and to the environment on which you depend for every necessary thing in your life (air, water, food, etc.), and which party can at least be nudged toward some sort of progress toward solving that problem.