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GMC Hummer EVs on the assembly line at General Motors' Factory ZERO electric vehicle assembly plant in Detroit on Nov. 17, 2021.Nic Antaya/Getty Images

The good news for Canada’s auto industry is that Canadian-built electric vehicles might some day be eligible for a US$7,500 tax credit under the breakthrough climate bill that U.S. President Joe Biden is expected to sign into law later this week, which scraps the Buy American provisions of an earlier legislative proposal that failed to win congressional approval.

The bad news is that, for now, the sourcing requirements in the Inflation Reduction Act, which passed the U.S. Senate on Sunday thanks to a tiebreaking vote by Vice-President Kamala Harris and is slated for a vote in the House of Representatives on Friday, are so restrictive that few EVs currently on the market, or expected to be produced in the next few years, could possibly meet them.

A U.S. Congressional Budget Office analysis pegged the value of the EV tax credits at a mere US$85-million in 2023, which works out to only about 11,000 EVs qualifying for the full US$7,500 next year. The cost of the tax credits would rise to US$1.4-billion by 2031, or the equivalent of about 190,000 EVs. By comparison, overall U.S. auto sales reached 14.9 million vehicles in 2021. EVs and plug-in hybrids accounted for 608,000, or about 4 per cent, of the total.

So, the Inflation Reduction Act does not appear to be the game-changer that North American auto industry executives hoped it would be. That is because the bill stipulates that that 40 per cent of the critical minerals, and 50 per cent of the components, used in EV batteries must come from the United States or a U.S. trading partner by 2024 to qualify for the full US$7,500 credit. The critical minerals threshold would rise to 80 per cent in 2027, while 100 per cent of EV battery components would have to be sourced in North America by 2028.

The Inflation Reduction Act also explicitly excludes from eligibility any EVs made with critical minerals and components that are extracted, processed or recycled by a “foreign entity of concern.” That provision is aimed squarely at China, which dominates the EV supply chain.

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West Virginia Democratic Senator Joe Manchin, who blocked Mr. Biden’s Build Back Better bill earlier this year, had made it clear he would not back tax credits for EVs assembled in North America with Chinese minerals and components. And he used his leverage to the maximum, winning concessions for his mining-dependent state.

“Right now, we’re about ready to put our whole eggs in one basket, thinking EVs are the way to go, and we’re going to be absolutely so taken advantage of, to the point to where we’re going to be held hostage by the foreign supply chain that China has a grip on,” Mr. Manchin said in June. “I just can’t believe we’re even thinking about going down that path, and I’m going to do everything I can to stop it. Because I think it’s stupid.”

He may have been right about that. But the latest tax credit provisions, worth about US$7.5-billion for newly purchased EVs over the next decade, are unlikely to be enough to accelerate efforts to build an all-North American EV supply chain. Much larger incentives and subsidies will likely be required to spur production on this continent.

Policy makers will also need to streamline the approvals process for new mines. Opposition from environmentalists has already derailed or delayed several proposed lithium mining projects in the United States. In Canada, there has been more talk than action when it comes to developing a critical minerals strategy. What’s more, the higher costs associated with sourcing and processing critical minerals in North America could put the price of EVs, already about 20 per cent more than gasoline-powered cars, out of reach for most consumers.

Much will depend on future gasoline prices. Data from car-shopping website Edmunds showed that U.S. consumer interest in EVs rose as gas prices surged in the first quarter of 2022, but plateaued in subsequent months as consumers became accustomed to higher prices at the pump. When gas prices began falling in late June, so did interest in EVs.

In the days leading up to the Senate vote, U.S. and foreign automakers lobbied to water down the EV tax credit rules. General Motors, which has announced plans to go all-electric by 2035, called the bill’s provisions “challenging” and warned they “could not be reached overnight.”

While GM delivered 582,000 vehicles in the United States in the second quarter of this year, only 7,217 were plug-in electric vehicles, accounting for just 1.7 per cent of GM’s total deliveries. The automaker last week announced that it “secured three new sourcing agreements for electric-vehicle battery materials” through to 2030 that would support its goal of producing one million EVs a year. But it did not provide details on the geographic origin of those materials.

While the Canadian auto industry owes Mr. Manchin a big “Thank You” for levelling the EV playing field in North America, other provisions in the Inflation Reduction Act are not as favourable for Canada. The bill provides for billions of dollars in grants and loans to enable automakers to build or convert EV manufacturing facilities in the United States. Governments here will need to do the same.

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