The Biden administration on Friday proposed new rules aimed at shifting more production of electric vehicle batteries and the materials that power them to the United States, in a bid to build a strategic industry now dominated by China.

The rules are intended to limit the role Chinese companies can play in supplying materials for electric vehicles that qualify for federal tax credits. They will also discourage companies seeking federal funding to build battery factories in the United States from purchasing materials from China or Russia.

The rules could spur significant changes to automotive supply chains, which remain heavily reliant on China for electric vehicle materials and components. They could also put pressure on automakers, which also face intense cost pressures as they try to shift their factories to make electric cars, with China offering some of the world’s most advanced and lowest-priced battery technologies.

The Biden administration is trying to use billions of dollars in new federal funding to change that dynamic and create an American supply chain for electric vehicles, using both the carrot and the stick.

The climate law that President Biden signed in 2022 includes up to $7,500 in tax credits for consumers who buy electric vehicles made in the United States, using primarily domestic materials. The law also included a blanket ban on Chinese products. Lawmakers ordered that companies from China, Russia, North Korea and Iran be prohibited from providing certain materials to cars that received those tax breaks.

But the law left open several questions, including what constitutes a Chinese or Russian company. Administration officials said those definitions include any entity incorporated or headquartered in China or Russia, as well as any company in which 25 percent of the board seats or ownership interest were held by the Chinese government. or Russian.

Chinese companies that establish operations in countries outside China appear to be able to benefit from the rules, as long as the Chinese government is not a significant shareholder.

The law also requires battery makers that enter into contracts or licensing agreements with Chinese companies to ensure they retain certain rights over their projects. This provision is intended to ensure that a Chinese company does not effectively have control of said project.

Some conservative lawmakers had questioned Ford Motor’s plans to license technology from the Chinese battery giant known as CATL for a plant in Marshall, Michigan, arguing that such a partnership should not be eligible for federal tax credits. Ford said Friday that it expected factory batteries to qualify for federal tax credits when production begins in 2026.

Some Republican lawmakers suggested Friday that the Treasury Department’s guidance did not go far enough.

“At a time when China is using massive subsidies to undercut American manufacturers and strangle the global market for battery components, naive new Treasury regulations would open the floodgates for American tax dollars to flow to complicit Chinese companies.” of trade violations and forced labor abuses.” said Rep. Mike Gallagher of Wisconsin, chairman of the House Select Committee on the Chinese Communist Party.

The rules will come into force for battery components in 2024 and in 2025 for critical minerals such as lithium, cobalt and nickel. They will remain open to public comment for several weeks and could be adjusted based on industry feedback.

The rules could have a profound impact on the rapidly growing U.S. electric vehicle market: Battery-powered vehicles accounted for about 8 percent of new cars sold in the third quarter. Auto and battery makers said Friday morning that they were still reviewing the 62 pages of rules released by the administration and that it would take time to determine how many models would qualify for tax credits.

John Bozzella, 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 administration had banned all minor Chinese parts from the supply chain, no car model would have qualified for tax credits next year, he said.

Many cars have already been disqualified from purchase credits by other rules, such as the requirement that vehicles 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 raised new questions about whether stricter requirements for supply chains could continue a trend that leads more buyers to lease, rather than buy, vehicles.

The ban on sourcing from China applies only to vehicles that are sold, not those that are rented. Consumers can receive tax credits for electric vehicles they lease from car dealers, and that has led to a boom in electric vehicle leasing.

Jack Fitzgerald, president of Fitzgerald Auto Malls, which operates dealerships in Florida, Maryland and Pennsylvania, said he had seen an increase in customers leasing electric vehicles. But he said concerns about EV range and the availability of chargers, rather than price, were holding back EV sales.

“That’s the main thing,” Fitzgerald said.

Auto industry lobbyists have warned that overly strict rules could stifle sales of electric vehicles and have urged the administration to close more trade deals to secure supplies of scarce battery minerals. But Paul Jacobson, General Motors’ chief financial officer, said the company had structured its electric vehicle operations to succeed regardless of federal rules.

“We’re not anchoring the business on saying this has to happen” regarding regulations, Jacobson told reporters Thursday. If regulations change, he added, “it won’t be taxing for us.”

While the rules may create headaches for automakers, they are likely to benefit companies that plan to supply batteries from factories in the United States.

“It’s actually good news for us,” said Siyu Huang, CEO of Factorial, a Massachusetts company that is developing batteries for next-generation electric vehicles with support from Mercedes-Benz, Hyundai and Dodge-owner Stellantis. Jeep and Ram.

Acquiring large quantities of lithium, an essential ingredient in batteries, could be difficult because most of the metal is processed in China, Huang said. But the rules will encourage investment in U.S.-based refineries, he continued. “It will definitely be another incentive to generate more domestic supply,” Huang said.

Several American companies have already begun investing in domestic factories and technologies aimed at developing lithium and other materials needed for electric vehicle batteries and other components.

John DeMaio, CEO of Graphex Technologies, which is building a factory in Michigan to process graphite for batteries, said the rules could temporarily slow sales of electric vehicles by making it harder to qualify for the tax credit. But in the long term, he said, they will encourage investment in national suppliers. “It may be a setback,” he said, “but overall it provides certainty and clarity to get people off the fence.”

Wally Adeyemo, 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 making the investments and Americans are buying these cars.”

Over the past year, companies invested $213 billion in the manufacturing and deployment of clean energy, clean vehicles, building electrification and carbon management technology in the United States, according to tracking by Rhodium Group and the Center for US Energy and Environmental Policy Research. the Massachusetts Institute of Technology. That’s a 37 percent increase from the previous year.

Still, the global electric vehicle industry remains heavily anchored in China, which is the world’s largest producer and exporter of electric vehicles. China produces about two-thirds of the world’s battery cells and refines most of the minerals that are key to powering an electric vehicle.

China’s dominance in critical mineral supply chains has raised concerns that Beijing could move to cut off the United States from materials that are essential not only for cars, but also for jet engines and ammunition.

Others have raised concerns about poor working conditions, the use of child labor and a lackluster environmental record of critical mineral supply chains traversing countries such as the Democratic Republic of the Congo and Indonesia.

Battery makers in Japan and South Korea have also gotten ahead of the rules because their supply chains are often closely integrated with those in China.

The rules also prevent automakers from sourcing the nickel used in their batteries from Russia, which is one of the world’s largest nickel producers.

One of the challenges for automakers will be to develop systems to track all of their battery components through a long and often opaque supply chain.

In its announcement, the Treasury Department said that vehicles that were incorrectly reported would be subtracted from an automaker’s eligibility for tax credits, and that automakers that committed fraud or intentionally ignored the rules could be declared ineligible. for credit in the future.

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