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How the Inflation Reduction Act (IRA) will accelerate the adoption of electric vehicles

How the Inflation Reduction Act (IRA) will accelerate the adoption of electric vehicles

A landmark climate and infrastructure bill, the “Inflation Reduction Act” of 2022 (IRA) is a bit of a misnomer. While the bill includes provisions that might reduce inflation by the end of the decade, it’s the investment in clean energy — especially electric vehicles (EVs) — that makes the bill monumental.

Businesses and consumers are now seeing the effects of the IRA in the form of tax credits. But how do these credits work?

We’ll cover the aspects of the bill relating to energy storage and other clean energy technologies in a future post. For now, read on to learn more about the Inflation Reduction Act and how it might save you a big chunk of change on your next EV purchase.

What is in the Inflation Reduction Act?

From the beginning, it was believed the IRA would have little impact on inflation, at least in the short term. However, the Congressional Budget Office (CBO) has stated that over the next decade the IRA will help cut the budget deficit by $238 billion, which economists expect to slightly lower inflation. This is because reducing government spending and increasing taxes would lower consumer demand and limit companies’ abilities to raise prices.

While macroeconomic effects still need time to play out, the Inflation Reduction Act’s EV component has already been a resounding success. In line with its stated goals to cut America’s greenhouse gas emissions, electric vehicle sales have increased more than 50% since the passage of the law. This tremendous growth is thanks in part to Inflation Reduction Act tax credits of up to $7,500.

Progress on renewable power has been more mixed. Analysts predicted that Inflation Reduction Act’s renewable energy provisions, like expanding tax credits for wind turbines, solar panels, batteries, and electric vehicles, would help the U.S. reduce greenhouse gas emissions to 40% of 2005 levels by 2030. However, as of February 2024, the U.S. was not on track to meet the 46 to 79 gigawatts of new carbon-free electricity that analysts had predicted the law would spur on.

“Buy American” is another major theme of the law. The IRA includes landmark legislation to subsidize and stimulate American manufacturing, setting aside over a trillion dollars to build and improve American infrastructure. The Center for American Progress reports that communities that lost manufacturing jobs are a major beneficiary of this aspect of the IRA.

There are other components of the IRA that run parallel to a clean energy future; on the healthcare front, the IRA is expected to save Medicare $300 billion on drug costs over the coming decade. The legislation also emphasizes an environmental justice component. Specifically the IRA states that government programs related to the law totaling $118 billion in federal funding must have at least 40% of their benefits go to disadvantaged communities.

Inflation Reduction Act: 2023 vs. 2024

While the Inflation Reduction Act is positioned to spur growth in new sectors, there are still elements that are being worked out. For example, there are changes to the Inflation Reduction Act vehicle tax credit policies for 2024.

Effective January 1, 2024, consumers no longer need to wait until they file their taxes to claim the credit. EV dealers are now offering it at the point-of-sale and the government is reimbursing the dealers. The IRS made this change to the Inflation Reduction Act vehicle rebate policy knowing that consumers prefer an immediate rebate at point-of-sale.

For manufacturers benefitting from Inflation Reduction Act vehicle tax credits, the IRS in December 2023 proposed new component sourcing requirements that would substantially reduce the number of EVs that qualify for the tax credit. Under the proposed regulations, EV manufacturers must not source critical minerals or battery components from foreign entities of concern, or “FEOCs.”

The regulations come as the U.S. races to develop alternative critical mineral and battery supply chains.

Inflation Reduction Act electric vehicle tax credits

New electric vehicle buyers must meet several criteria to receive an Inflation Reduction Act EV tax credit. Specifically, buyers must:

  • Purchase the EV for their own personal use
  • Use the vehicle primarily in the United States
  • Have a modified annual gross income not exceeding $150,000 for single individuals, $300,000 for married couples filing jointly, or $225,000 for heads of households

To qualify for the credit, the vehicle must meet certain conditions. The vehicle must have a battery capacity of at least 7 kilowatt hours, weigh less than 14,000 pounds, and undergo final assembly in North America. The MSRP cannot exceed $80,000 for vans, SUVs, or pickup trucks, or $55,000 for all other vehicles. The IRS lays out the full criteria on its website.

The Inflation Reduction Act EV credit that buyers receive depends on the specifications of the vehicle. The amount is calculated by adding together the following:

  • $2,500 base amount
  • $417 for vehicles with at least 7 kilowatt hours of battery capacity
  • An additional $417 per each kilowatt hour of capacity beyond 5 kilowatts

The maximum Inflation Reduction Act EV tax credit for new vehicles is $7,500.

Since April 18, 2023, there have also been critical mineral and battery requirements that the vehicle must meet for buyers to receive credit.

As of 2024, 50% of the critical minerals in the vehicle’s battery must be extracted or processed in the U.S. or a country with which the U.S. has a free trade agreement. The required percentage will continue to increase by 10 percentage points each year until 2027, at which point 80% or more of the value of the critical minerals vehicle’s battery must meet this condition.

Also, starting in 2025, eligible vehicles may not contain elements extracted, processed, or recycled by an FOEC. The Department of Energy considers FOECs to be foreign businesses or other entities controlled by or under the jurisdiction of China, Russia, Iran, or North Korea.

Calculating the “percentage of the value of the critical minerals contained in the battery” is a complex process, but it’s the responsibility of manufacturers. Thankfully for consumers, maintains a list of vehicles eligible for Inflation Reduction Act tax credits and the amount of the tax credit.

With these requirements, the U.S. government aims to spur on decarbonization while encouraging the development of alternative supply chains for critical minerals. These fragile supply chains often represent economic, geopolitical, and national security risks for the U.S., which depends heavily on these resources to power clean tech and digital technologies.

For consumers, the IRA is finally making the cost of EVs competitive with that of gas-powered vehicles.

Alsym Energy and the Inflation Reduction Act

Many of the provisions in the IRA aim to decouple the U.S. clean tech economy from volatile supply chains and achieve energy independence. With our next-generation, non-lithium energy storage technology, Alsym Energy is leading the way on this urgent matter.

Alsym batteries, made only using low-cost, readily available materials, can help auto manufacturers meet these evolving Inflation Reduction Act EV tax credit requirements. By skirting precarious essential mineral supply chains altogether, Alsym batteries will help promote electric vehicles competitiveness with gasoline-powered vehicles by maintaining access to Inflation Reduction Act tax credits.

Alsym’s innovative technology is powering the future of not only electric cars and bikes, but also stationary and grid storage. Our technology can also serve important marine and off-shore applications. In the EV sector and beyond, Alsym’s involvement in the clean energy sector will strengthen the U.S. economy by creating jobs, fostering innovation, and promoting energy independence.

Learn more about how Alsym is supporting the development of a sustainable clean energy future in the U.S. and check out our blog for more news and insights in the dynamic clean energy space.