Biden’s EV tax credit expansion: Handouts for what automakers are already doing

Promotion of a nationwide electric vehicle (EV) rollout is taking center stage in both the public and private sectors, as the infrastructure plan and automotive commitments have recently highlighted.

GM, Ford and Stellantis (which includes Fiat Chrysler) have pledged to electrify up to 50 percent of new sales by 2030, in line with government EV targets. These government targets are supported by public funds for EV charging infrastructure ($7.5 billion) and a proposed federal tax credit expansion. Following private-sector pledges, multiple billion-dollar investments were announced into battery and EV assembly plants by GM and LG Chem in Ohio as well as Ford and SK Innovation in Tennessee and Kentucky, giving dynamism to a nascent U.S. battery market, which currently only hosts 10 megafactories (while there are 16 in Europe and 136 in China).

As for the Build Back Better bill, the Financial Times broke down the incentives for taxpayers, noting, “for the first five years after the bill is enacted, buyers of electric cars will be given $7,500 of credit regardless of where the vehicle is made. But for five years after that, the credit will only apply to cars made in the US. Moreover, there’s $500 of tax credit available for any car with a US-made battery, and another $4,500 if the car is made in a plant with a union.”

From a public sector perspective, these economic incentives aim to promote domestic EV and battery manufacturing, which, in turn, leads to high-skill job creation in politically contested regions like the Midwest. However, the reasons why Ford chose Tennessee and Kentucky include, but are not limited to, the access to sustainable (and cheap) energy, low construction (and operating) expenses, proximity to suppliers as well as local incentives. Since the $11.4 billion investment preceded the federal tax credit expansion plan, private sector investments are not a result, but rather a cause, of the recently announced incentive for domestic battery production. A $500 dollar incentive is unlikely to drive billion-dollar battery plant investments, although it does provide political rhetoric to take credit for them.

This is accentuated through analysis of the recently passed $1.2 trillion infrastructure bill, which only included $7 billion for battery supply chain expansion, representing only a fraction of the entire bill (0.58 percent) and other EV purchase subsidies which account for approximately $174 billion. Therefore, at relatively moderate cost, Democrats can take credit for every new job created in the U.S. battery sector, even if this employment creation is not directly correlated with federal incentives.

Politically, little is to be lost, and much is to be gained, in an expansion of battery employment, especially in Midwestern swing states and Southern red states.

From an environmental perspective, these states are also best placed to specialize in energy-intensive battery production, as grid carbon intensity of the Tennessee Valley Authority (TVA) is below the national average, due to reliance on hydro and nuclear resources. This creates a double bottom line, as job creation (social), in key states, is coupled with climate protection (environmental), while simultaneously avoiding social back clash and increasing political capital as the EV transition unfolds.

From a private sector perspective, transporting heavy batteries over long distances is costly, therefore, it is in the interest of automakers to develop a domestic EV market, to drive down manufacturing cost, and thus, maintain dominant position among all U.S. vehicle segments. An underdeveloped domestic EV market poses a potential risk for U.S. automakers abroad, as cost-savings will be foregone, reducing competitivity globally. This is the reason why GM and Ford have invested in domestic battery manufacturing before any federal incentives were announced. Hence, with the proposed tax credit expansion, automakers would be incentivized to do what they have already been doing.

From an international perspective, long-term automotive partners, such as Mexico and Canada, are increasingly antagonized, as U.S.-based battery manufacturing incentives represent an indirect trade barrier to the potential development of a neighboring battery markets. Canada is endowed in critical minerals such as lithium, graphite and cobalt, which are key for large-scale battery manufacturing. Over 70 percent of these minerals are processed in China according to the IEA, which makes aggravating Canada an unwise strategy from a long-term supply chain perspective. The automotive industry in Mexico exports 80 percent of its products, accounting for 3 percent of GDP and employing 1 million people domestically.

As the main export destination remains the U.S., protectionist trade policy will further delay the battery transition in both Mexico and Canada, leading to detrimental effects, not only on intra-American relations, but also on job security, supply chain creation and the environment at large.

Just this week, the EU publicly criticized Biden’s EV tax expansion plan and Toyota has announced a $1.3 billion investment in EV batteries in North Carolina while also opposing the Biden plan. This highlights that these investments are not because of, but rather despite, the tax credit expansion proposal.

All in all, private and public sector incentives align when it comes to battery manufacturing, leading to economic handouts for the former, to do what it has already been doing, and for the latter to take political credit for it, especially in contested swing states, at the cost of antagonizing strategic automotive partners

Johan Bracht is a research assistant at New York University’s School of Professional Studies. Bracht previously worked as an EU-policy analyst for Hydrogen Europe in Brussels and for BMW in Geneva and Munich, managing electric vehicle markets.