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Why there's a 'high bar' for new EV tax credits, according to a Biden economic adviser

The White House’s top economic adviser defended restrictions placed on the Inflation Reduction Act (IRA)’s key tax credits that are intended to accelerate electric vehicle (EV) adoption.

Under the new bill President Joe Biden signed into law on Monday, drivers are eligible for a $7,500 tax credit for new EVs or $4,000 for used vehicles largely sourced and manufactured in the U.S.

However, critics — including some carmakers — have criticized the administration for limitations placed, saying it’s likely to slow down the adoption of EVs and leave drivers with few options.

“Certainly, it sets a high bar that that tax credit is eligible for batteries and vehicles that are produced in the United States or in North America or countries that we have free trade agreements with,” Brian Deese, director of the National Economic Council, told Yahoo Finance Live (video above). “We think that that's an appropriate bar because what we want across time is to provide a strong incentive for us to have secure supply chains in those areas.”

Specifically, the new law restricts the full tax credit to EVs with battery material sourced from the U.S. or free-trade partners, starting in 2024. Any minerals or components sourced from “foreign entities of concern” including China would not qualify for the $7,500 credit. Final assembly of the vehicle would also need to take place in North America.

Adding to the restrictions, the law only applies to vehicles with a manufacturer suggested retail price (MSRP) below $55,000 for cars and below $80,000 for trucks and SUVs.

A necessary step

Biden has hailed the hundreds of billions of dollars committed to tackling climate change through the IRA as “one of the most significant laws in recent history,” but carmakers have criticized the new legislation for attaching too many strings and limiting the wide-scale adoption of clean cars.

In a recent interview with Yahoo Finance Live, Fisker CEO Henrik Fisker called the restrictions counterproductive, arguing that the limitations would actually “slow the adoption of EVs.”

“It's going to offer less choice to the consumers," he said. "I'll be surprised if there's even 10 vehicles in the US that will qualify for the full amount."

An analysis by the Congressional Budget Office estimated the $85 million set aside for new EV credits in the 2023 fiscal years would only translate to 11,000 new vehicles sold under the $7,500 credit. That pales in comparison to roughly 630,000 EVs sold in 2021 just in the U.S.

Deese said the “high bar” is a necessary step to entice carmakers into investing in supply chains closer to home. An overwhelming majority of minerals and components used in vehicles today are currently sourced from China.

President Biden gestures after driving a Hummer EV during a tour at the General Motors 'Factory ZERO' electric vehicle assembly plant in Detroit, November 17, 2021. REUTERS/Jonathan Ernst
President Biden gestures after driving a Hummer EV during a tour at the General Motors 'Factory ZERO' electric vehicle assembly plant in Detroit, November 17, 2021. REUTERS/Jonathan Ernst (Jonathan Ernst / reuters)

“The core of this bill on the clean energy side is to provide long-term technology-neutral tax credits so that we generate lower carbon energy here in the United States and we generate the technology and the technological advances that come with that,” he said. “We certainly expect that because of this legislation, companies and the suppliers in the supply chain are going to respond quite significantly.”

Companies like General Motors (GM) have already responded by seeking out minerals sourced in the U.S, and investing in mining operations in places like California. But the timeline for completion of those projects still remain years away.

The Alliance for Automotive Innovation — a trade group that counts Toyota (TM), Ford (F), and GM among its members — estimated that 70% of the 72 EV models currently sold on the market will be ineligible for the new car tax credits because of the restrictions.

In the immediate term, Deese said, the $4,000 tax credit for used cars would likely accelerate adoption, given that the same limitations do not apply.

“Most Americans who are out there buying vehicles are actually buying used cars, particularly lower working class folks,” he said. “So we have more electric vehicles in our vehicle mix. Having a credit for used vehicles is incredibly powerful. It helps broaden the number of Americans who could see themselves getting into an electric vehicle."

Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita

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