The Inflation Reduction Act of 2022


Original Publication


Electric Vehicles

Tax Credit

The Inflation Reduction Act of 2022 (IRA) signed into law by President Biden on August 16, contains the Federal Government’s largest ever investment in fighting climate change by extending new tax credits for manufacturers of clean energy equipment in the form of close to $400 billion in tax incentives, with the aim to transition away from fossil fuels and accelerating the country’s energy transition whilst also reducing its carbon emissions. 

“The bill aims to accelerate the adoption of electric vehicles (EVs) across the country by extending a tax credit up to USD $7,500 for buyers of new all-electric cars"

The bill aims to accelerate the adoption of electric vehicles (EVs) across the country by extending a tax credit up to USD $7,500 for buyers of new all-electric cars delivered at the point of sale. Qualifying new vehicles will receive USD $3,750 for meeting each of the critical mineral and battery component sourcing requirements. Hybrid plug-ins as well as qualifying used clean vehicles will benefit from a tax credit of up to USD $4,000 or 30% of the vehicle cost, whichever is lower, until 2032.  One significant change in the new proposal is The Section 30D Clean Vehicle Credit, which scraps the 200,000 cumulative volume limits for automakers, beginning in 2023. This means many leading EV manufacturers that met the 200,000-unit-per-manufacturer cap on sales in the early stages of the previous bill, will now be eligible for the tax credit yet again. 

“There are currently 20 countries that have FTAs with the U.S."

To qualify, automakers will need to process 50% of anode and cathode materials in the U.S., by 2023. To meet the critical mineral requirement, 40% needs to be extracted and processed in the U.S. or in a country with a US Free Trade Agreement (FTA) by 2023. There are currently 20 countries that have FTAs with the U.S., among which Australia, Canada and Chile stand to benefit the most by providing primary sources of these processed battery minerals.

Another key section of the IRA is the 45X The Advanced Manufacturing Production Credit. A segment of this legislation is aimed at accelerating the adoption of EV’s by supporting the preliminary stages of the supply chain. The 45X section provides a tax credit for fundamental parts of the electric vehicle supply chain such as critical minerals, electrode active materials, battery cells and battery modules.  Jointly, The Advanced Manufacturing Production Credit (45X) and the Advanced Energy Project Tax Credit (48C) provides a $35 per kilowatt-hour (kWh) in each battery cell and a $10/kWh in each battery module, and additionally covers 10% of the production costs of the applicable critical materials incurred by the taxpayer.

At first glance, the full tax credit of USD $7,500 for new electric vehicles sold in the U.S. appears to be making EV's more affordable to mainstream buyers. In 2021, EV's represented 3% of all vehicle sales in North America at an average price of USD $66,000. With the tax credit being applied to new EV's selling for less than USD $55,000, the average purchase price will likely reduce to below USD $50,000 within a few years, putting EV's within reach for most consumers. To qualify for the tax credit earning is capped at $150,000 for a single person, or $300,000 as a couple. U.S. automakers will be incentivised over the long-term to reorient their supply chains to rely less on overseas battery manufacturers and related component materials through The Advanced Manufacturing Production and Energy Project Tax Credit incentives.

The net effect of The Inflation Reduction Act on Electric Vehicles will be greater energy independence, less reliance on off-shore automotive supply chains, expanded renewable energy sources and increased manufacturing investment in American-built EV's. The Inflation Reduction Act is ostensibly a new, re-branded version of the Build Back Better Act (BBBA), which passed the house in 2021, but with a greater focus on de-carbonisation activities and reduction of fossil fuels, where companies associated with the electric vehicle supply chain will be among the largest and most direct beneficiaries of the Acts' tax incentives.