Efforts to combat global warming could suffer a setback next year when new rules reduce the number of electric cars eligible for a federal tax credit.
The credits, of 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 credit when they buy a car, rather than asking them to claim it on their tax return.
But it will become harder to get that subsidy on Jan. 1 because of Biden administration rules intended to encourage automakers to make vehicles and parts in North America, while bypassing China. Most automakers are still far from ending their dependence on China for batteries and critical materials like refined lithium.
Another obstacle to electric vehicles is the stricter rules, which arise from the Inflation Reduction Act. Sales of these cars and trucks are already growing more slowly than a year ago because of high interest rates and drivers’ anxiety about finding charging stations.
Electric vehicles remain the fastest-growing segment of the auto industry, and Americans have already purchased more than a million of them this year. Sales will increase another 32% in 2024, according to BloombergNEF, up from 47% in 2023. But Ford Motor, General Motors and Tesla have slowed their investments as the pace of growth has slowed.
THE list The number of fully electric vehicles eligible for tax credits was already limited. Under rules that took effect this year, the credit was only available to cars made in North America.
To get the full credit, automakers must also meet quotas on the amount of battery components and certain raw materials sourced from the United States or trade allies. Tesla, General Motors, Ford, Volkswagen, Rivian and Nissan are the only companies to offer electric cars qualifying for at least a partial credit. Some plug-in hybrid cars from Audi, BMW, Chrysler, Jeep and Lincoln also benefit from tax breaks.
New rules that took effect Jan. 1 add another set of restrictions, disqualifying vehicles containing components made in China or manufactured elsewhere by a company under the control of the Chinese government.
“If it was already confusing to consumers, this is getting even more confusing,” said Kevin Roberts, director of industry insights and insights at CarGurus, an online marketplace.
Tesla, which accounts for half of all electric vehicles sold in the United States, warned on its website that the cheapest Model 3 sedan and its long-range version would no longer be eligible after December 31. in China. Existing credits lowered the price of the base Model 3 to around $30,000, on par with similarly equipped gasoline cars like the Toyota Camry or Honda Accord.
The stricter rules will also disqualify Ford’s Mustang Mach-E, which was eligible for half the credit and was the fourth most popular electric vehicle in the United States this year. Ford still doesn’t know whether the F-150 Lighting, an electric pickup, will be eligible, a spokesperson said.
The rules are complex and could still be changed by administration officials, causing confusion among industry executives. In the worst case, only a handful of vehicles will be eligible.
Volkswagen said it is “cautiously optimistic” that its ID.4 electric sport utility vehicle, manufactured in Chattanooga, Tennessee, will continue to qualify for the credit.
General Motors said it was evaluating whether its electric lineup, which includes the Chevrolet Bolt and an electric version of the Silverado pickup, would 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 pickup trucks and SUVs qualify, also did not respond.
There is another way for drivers to benefit from the credit. As part of an exception for companies with vehicle fleets, the Inflation Reduction Act allows dealers to apply the subsidy to leased vehicles and pass it on to customers. This feature has helped Hyundai and other foreign automakers remain competitive even though they don’t produce electric vehicles or batteries in the United States.
More than 40% of Hyundai’s electric vehicle sales are rentals, a spokesperson said, up from just 5% before the new restrictions took effect this year. The same provision of the law allows people who lease cars manufactured abroad by Mercedes-Benz, BMW, Volvo and Polestar to benefit indirectly from the credit.
But leasing is not a panacea. Many people prefer to own their own car, and foreign automakers are upset that they have been excluded from subsidies for buyers. Electric vehicle credit “is too complex and unfortunately creates confusion for customers and dealers,” Volvo Cars said in a statement.
But lawmakers who wrote and passed the Inflation Reduction Act said they wrote it to force automakers to realign their supply chains. This is happening, but it will take time for the changes to bear fruit.
The list of eligible vehicles could grow during 2024 as automakers ramp up production in the United States to qualify for credits and other subsidies.
Korean automaker Kia plans to start producing the EV9, a seven-passenger electric sport utility vehicle, at a factory in Georgia next year. These domestically assembled vehicles should be eligible for half the credit, or $3,750, a Kia spokesperson said.
Stellantis, which owns Chrysler, Dodge, Ram and Jeep, plans to introduce six mainstream electric vehicles in 2024, including versions of the Dodge Charger, Jeep Wagoneer and Ram Pickup. The company did not say whether the vehicles would be eligible for credits.
Some hybrids, equipped with internal combustion engines and electric motors, will also be eligible if they meet supply requirements and have a battery with a capacity of at least seven kilowatt hours.
The Chrysler Pacifica Hybrid will most likely still be eligible for a $7,500 credit, a company spokesperson said, while buyers of the Jeep Grand Cherokee 4xe and Jeep Wrangler 4xe hybrids should be eligible for up to $3,750. $.
Market forces are driving down prices for electric vehicles, a trend that is expected to continue as automakers increase production. The average list price of an electric vehicle fell to $63,000 in November, from $68,000 a year earlier, according to CarGurus. The average list price for a vehicle with an internal combustion engine was $48,000, the same as the previous year.
Federal subsidies and loans to battery and electric car factories also help drive down prices. Over the next few years, analysts expect electric vehicles to become cheaper than internal combustion models, even without tax credits.
“The long-term trend will be one of lower prices,” said Mr. Roberts of CarGurus. “You’re going to see more mainstream vehicles.”
