Weekly Brief: BEV Giants’ Tax Boost but Minnows on the Ropes

Democrats in the US Senate agreed to a climate bill that will eliminate the cap on electric vehicle credits, marking a major win for the auto industry.

The $369Bn deal, if signed into law, will represent the most far-reaching and ambitious climate policy ever realized in the US. Its tax credits for EVs and renewable energy projects like solar and wind will shift the country away from fossil fuels and are projected to reduce CO2 emissions by 40% below 2005 levels in the next eight years, according to independent analysis.

Under current regulation, tax credits begin to taper off once a company sells more than 200,000 EVs and expire completely a year after the 200,000 threshold is crossed. Tesla, General Motors and Toyota all fall into this category, while Ford and Nissan are quickly approaching the cap. Under the new law, the 200,000 limit will disappear indefinitely. Carmakers that have phased out will once again qualify, so long as they meet certain new conditions.

Those conditions are as follows:

• First, both the EV and its battery must be made mostly in North America, “mostly” is defined as 50% through 2024, 60% in 2025, 70% in 2026, 80% in 2027, 90% in 2028 and 100% made in North America by 2029;
• Secondly, consumers will only qualify for the tax credits if their annual income is less than $150,000 for individuals and $300,000 for couples filing jointly;
• Finally, federal tax credits will only apply to sports cars and sedans whose sticker price is less than $55,000 and for electric pickups, SUVs and vans that retail for less than $80,000.

Despite these conditions, the auto industry should be thrilled. Automakers like Tesla, GM and Toyota have been lobbying hard for this result, for obvious reasons. However, setting the EV big three aside, the broader industry for electric vehicles in America is still in a nascent and vulnerable state. Capital is increasingly hard to come by and supply chains are wreaking havoc, making survival no sure thing for fledgling companies.

A case in point, last week news leaked that EV start-up Faraday Future will further delay the debut of its flagship FF91 EV because of challenges across the supply chain. The company is running low on cash, despite going public a year ago via a special purpose acquisition company that infused it with $1Bn of fresh funding. Things are getting so dire 12 months later that it might not make it to the end of the year if it can’t raise more capital quickly, the start-up said in a regulatory filing.

Meanwhile Rivian announced last week that it’s trimming back its US workforce 6% owing to raging inflation, rising interest rates and soaring commodity prices that have necessitated an urgent internal restructuring. None of the company’s essential operations at its plant in Illinois will be affected and production of the R1 pickup and research and development of future vehicles like the R2 should proceed as normal, the company said, at least for now.

Tesla already began cutbacks earlier in the summer; start-up Lordstown Motors is on the ropes and was saved in May by Foxconn’s largesse. Put it all together and there’s a clear need for federal assistance in supporting EVs.

It’s not time to celebrate yet. Democrats have to make sure that all 48 Democratic senators and both independents are in line and healthy when the bill comes before the chamber next week in order to ensure passage. Then the Democratic majority in the House has to stay in line. If anyone gets second thoughts (or Covid), the future of the bill could be thrown into jeopardy.