By 2024, fewer electric vehicles will qualify for federal tax credits

Efforts to combat global warming could suffer a setback next year if new rules reduce the number of electric cars that qualify for a federal tax credit.

The credits, up to $7,500 per vehicle, have helped make electric cars more affordable, bringing the cost of some models below $30,000. Next year, for the first time, dealers will be able to give buyers the credit when they buy a car, instead of telling them to include it on their tax returns.

But qualifying for the subsidy will become more difficult on Jan. 1 due to Biden administration rules aimed at encouraging automakers to produce vehicles and parts in North America while bypassing China. Most automakers are still years away from breaking their dependence on China for batteries and essential materials such as refined lithium.

The stricter regulations, resulting from the Inflation Reduction Act, pose another hurdle for electric vehicles. Sales of such cars and trucks are already growing less quickly than a year ago due to high interest rates and drivers’ fear of finding charging stations.

Electric vehicles are still the fastest growing segment of the auto industry, and Americans have already purchased more than a million of them this year. According to BloombergNEF, sales will rise another 32 percent in 2024, compared to 47 percent in 2023. But Ford Motor, General Motors and Tesla have slowed investments as the growth rate has slowed.

The list The number of fully electric vehicles eligible for tax credits was already limited. Under rules that went into effect this year, the credit was only available for cars produced in North America.

To gain full credit, automakers must also meet quotas on the quantity of their battery components and certain raw materials coming from the United States or trading partners. Tesla, General Motors, Ford, Volkswagen, Rivian and Nissan are the only companies offering electric cars that qualify for at least a partial credit. Some plug-in hybrid cars from Audi, BMW, Chrysler, Jeep and Lincoln are also eligible for tax credits.

New rules coming into effect on January 1 will add another set of restrictions, disqualifying vehicles that contain parts made in China or made elsewhere by a company controlled by the Chinese government.

“If it was confusing for consumers, it’s about to get even more confusing,” said Kevin Roberts, director of industry insights and analytics at CarGurus, an online marketplace.

Tesla, which accounts for half of all electric vehicles sold in the United States, has warned on its website that the cheapest Model 3 sedan and a long-range version will no longer be eligible after December 31. The cars are equipped with a battery made in China. The existing credits lowered the price of the base Model 3 to about $30,000, comparable to comparably equipped gasoline cars like the Toyota Camry or Honda Accord.

The stricter rules will also disqualify Ford’s Mustang Mach-E, which qualified for half the honor and was the fourth most popular electric car in the US this year. Ford is still determining whether the F-150 Lighting, an electric pickup, is eligible, a spokesperson said.

The rules are complex and still subject to change by government officials, causing confusion among industry executives. In the worst case scenario, only a handful of vehicles will qualify.

Volkswagen said it is “cautiously optimistic” that its ID.4 electric SUV, made in Chattanooga, Tennessee, will continue to receive the honor.

General Motors said it is assessing whether its electric lineup, which includes the Chevrolet Bolt and an electric version of the Silverado pickup, will qualify. Nissan, whose electric Leaf is eligible for half of the $7,500 credit, did not respond to a request for comment. Rivian, whose electric pickups and SUVs were eligible, also did not respond.

There is another way drivers can benefit from the credit. Under an exception for companies with a fleet, the Inflation Reduction Act allows dealers to apply the subsidy to lease cars and pass it on to customers. That wrinkle has helped Hyundai and other foreign automakers stay competitive even though they don’t produce electric vehicles and batteries in the United States.

More than 40 percent of Hyundai’s electric vehicle sales are leases, a spokesman said, compared to just 5 percent before the new restrictions came into effect this year. The same provision in the law allows people who lease cars made by Mercedes-Benz, BMW, Volvo and Polestar abroad to receive the credit indirectly.

But leasing is not a panacea. Many people prefer to own their cars, and foreign carmakers resent being excluded from the subsidies available to buyers. The credit for electric vehicles “is too complex and unfortunately causes confusion among customers and dealers,” Volvo Cars said in a statement.

But the lawmakers who drafted and passed the Inflation Reduction Act have said they wrote it to force automakers to realign their supply chains. That is happening, but it will take some time for the changes to bear fruit.

The list of eligible vehicles could grow through 2024 as automakers ramp up U.S. production to qualify for the credits and other subsidies.

Korean automaker Kia expects to start production of the EV9, a seven-passenger electric SUV, at a plant in Georgia next year. Those domestically assembled vehicles should qualify for half the credit, or $3,750, a Kia spokesperson said.

Stellantis, which owns Chrysler, Dodge, Ram and Jeep, plans to introduce six mass-market electric vehicles by 2024, including versions of the Dodge Charger, Jeep Wagoneer and Ram pickup. The company has not said whether the vehicles are eligible for credits.

Some hybrids, which have combustion engines and electric motors, are also eligible if they meet the purchasing requirements and have a battery with a capacity of at least seven kilowatt hours.

The Chrysler Pacifica Hybrid will most likely still qualify for a $7,500 credit, a company spokesperson said, while buyers of the Jeep Grand Cherokee 4xe and Jeep Wrangler 4xe hybrids are expected to qualify for up to $3,750.

Market forces are pushing down electric vehicle prices, a trend that is expected to continue as automakers increase production. According to CarGurus, the average list price of an electric vehicle fell to $63,000 in November from $68,000 a year earlier. The average list price of an internal combustion engine vehicle was $48,000, the same as the previous year.

Federal grants and loans for battery factories and electric car factories are also helping to lower prices. Analysts expect electric vehicles to become cheaper than internal combustion engine models at some point in the coming years, even without tax breaks.

“The long-term trend will be one of price reductions,” said CarGurus’ Mr Roberts. “You’re going to see more regular vehicles.”