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The Biden administration has offered limited relief to carmakers worried about being frozen out of generous new US tax credits for electric vehicles, proposing rules on battery minerals that would expand access to the subsidies.

The long-awaited guidance released by the Treasury department on Friday spells out details on EV incentives established by the Inflation Reduction Act, the landmark climate law that featured $369bn for clean energy.

The bill signed last year made purchasers eligible for up to $7,500 in tax credits for EVs subject to stringent criteria including the origins of battery minerals and battery components. The provisions, meant to boost domestic manufacturing and jobs while fostering clean energy, are expected to cut the number of eligible vehicle models in the next few years. They have also led to spats with US allies whose carmakers want access to the nascent American EV market.

Friday’s proposal would widen the scope of eligibility as it pertains to “critical minerals” that go into EV batteries, making it easier for some to be sourced overseas.

Under the IRA law, at least 40 per cent of critical minerals in EV batteries must be extracted or processed in the US or in countries with US free trade agreements such as Mexico and Canada for vehicles to receive the tax credit. The percentage moves up to 80 per cent by 2027.

The new guidance says that “newly negotiated critical minerals agreements” — such as one the US reached with Japan this week and one being discussed with the EU — would be considered equivalent to free trade agreements in terms of eligibility for the subsidy. The determination will be greeted with relief in Brussels and Tokyo, which do not have congressionally approved free trade agreements with the US.

The proposed rules also define active cathode and anode materials, chemicals used to produce two main parts of a battery, “critical minerals” rather than battery components. The climate law requires an increasing percentage of EV battery components to be manufactured and assembled in North America to be eligible for subsidies.

Such a move was supported by large manufacturers including Volkswagen and Panasonic because it would allow the materials to be obtained from countries outside of North America. Classifying the cathode and anode materials as battery components, which have stricter requirements, would have disqualified such countries.

The IRA law requires that by 2024 no components eligible for credits can be manufactured in “foreign entities of concern” such as China, Russia, Iran and North Korea, nor can battery components include any critical minerals from those countries by 2025. US officials’ guidance refrained from clarifying their stance on the origin of battery components.

The tightening requirements of the law had been expected to cut back on the number of eligible vehicles in the next few years, despite the new Treasury guidance. The US has virtually no mining or processing capacity for minerals like lithium, nickel, and cobalt, according to an International Energy Agency analysis. The country also produces less than 5 per cent of the world’s cathodes and anodes.

A senior administration official said the new rules would “reduce the number of electric vehicles currently eligible for the full credit in the short term in order to create incentives to bring supply chains and manufacturing to the United States”. But the official added: “We believe these requirements will significantly increase the number of vehicles made and sold in the US over the next decade as new investments and American production come online”.

The Alliance for Automotive Innovation, the trade group representing the largest auto and battery manufacturers, said it expects few models to qualify for the full tax credit and that many questions remained about sourcing requirements.

“We now know the EV tax credit playing field for the next year or so. March 2023 was as good as it gets,” said John Bozzella, chief executive of the Alliance for Automotive Innovation.

The Treasury’s policy on tax credits has pitted large manufacturers against labour unions and a handful of US companies that argue a hardline approach is important to support domestic employment and ensure the subsidy fulfils objectives to boost US manufacturing.

The United Steelworkers union urged Treasury secretary Janet Yellen in a letter earlier this month not to broadly interpret the free trade agreement provision nor expand the definition of critical minerals in the tax credit, arguing it would “damage” the country’s ability to create thousands of jobs.

Ahead of the new guidance, top Democratic lawmakers including Ron Wyden, the Oregon senator, harshly criticised the administration for negotiating narrow trade deals that would help expand the eligibility for the tax credits.

More than $56bn in electric vehicle and battery projects have been announced in the US since the Inflation Reduction Act’s passage, according to an FT analysis. Despite these commitments, the US supply chain remains relatively nascent.

“The [IRA] is trying to do a lot of things, big things, . . . and the goals are sometimes in conflict,” said Daniel Kiely, a tax lawyer at Mayer Brown. “Congress passed the statute with a lot of very clear goals in mind but left key interpretation to Treasury, and they’ve had to make some pretty difficult decisions.”

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