Canada-made EVs to qualify for tax credits in U.S., after all

Electric vehicles made in Canada will qualify for hefty consumer tax credits in the United States after all. That has those in Canada’s auto industry celebrating.

U.S. lawmakers are studying the $739-billion (all figures in USD) proposal struck by two top negotiators, Democrat Senate Majority Leader Chuck Schumer and holdout Sen. Joe Manchin, the conservative West Virginia Democrat who rejected U.S. President Joe Biden's earlier drafts but surprised colleagues late Wednesday with a new one.

The Democrats' 725-page “Inflation Reduction Act of 2022” would invest $369 billion over the decade in climate change-fighting strategies including investments in renewable energy production and tax rebates for consumers to buy new or used electric vehicles.

It's broken down to include $60 billion for a clean energy manufacturing tax credit and $30 billion for a production tax credit for wind and solar, seen as ways to boost and support industries that can help curb the country's dependence on fossil fuels.

Most importantly for the Canadian auto industry, there are incentives for buying electric vehicles, including a $4,000 tax credit for the purchase of used electric vehicles and $7,500 for new EVs. Under a previous proposal, the tax credits would only apply to vehicles assembled in the United States.

According to the Canadian government, the previous proposal amounted to a 34-per-cent tariff on electric vehicles assembled in Canada and violated the terms of the United States-Mexico-Canada Agreement, or USMCA, the Canadian Press reported earlier this year.

But the bill is littered with references to tax credits applied to North American vehicles.

“It is encouraging to see the new U.S. Senate proposals aimed at boosting EV adoption, including an expansion of the EV tax credit and a used EV incentive," said Brian Kingston, head of the Canadian Vehicle Manufacturers' Association, which represents the interests of the Detroit Three automakers in Canada. "The emphasis on North American produced vehicles underscores the integrated nature of the automotive industry.”

Flavio Volpe, president of the Toronto-based Automotive Parts Manufacturers’ Association, applauds the deal.

“Trade War averted on the crazy proposed U.S. EV tax credit that illegally excluded Canada-made vehicles,” he tweeted late Wednesday night. “New Democrat Senate package with Sen. Joe Manchin support now says credit applies to vehicles ‘manufactured in North America.’ A lot of us spent a lot of time on this.”

Volpe and Canadian government officials lobbied hard against Biden's idea of applying the U.S. tax credit only to American-made EVs.

Volpe said that excluding Canada-made vehicles “was against the core principles of USMCA” and was also “especially harmful to American car makers in Canada who sell almost exclusively to Americans.”

Francesco Sorbara, the chair of the federal Liberal auto caucus, called the new bill “very constructive and welcome news for Canada’s automotive manufacturing sector” especially because of "the ongoing transition to electric [and] hybrid vehicles.”

A prior proposal by Biden’s administration allowed unionized carmakers to offer an additional $4,500 to EV car buyers, but the provision was opposed by Manchin amid strong blowback from companies such as Tesla and Toyota, who argued it would have given an unfair advantage to their Detroit-based rivals.

EV BATTERY PROVISIONS, TOO

While the latest draft of the proposed bill drops the union-built requirements, it adds provisions for battery materials and components.  

For an EV to qualify for the full incentive, a portion of the critical materials in its battery must be “extracted or processed in any country with which the United States has a free trade agreement,” the proposed legislation stipulates. The materials also qualify if they are produced at a North American recycling operation.  

The required percentage of battery metals produced domestically or coming from U.S. trade partners starts at 40 per cent and scales up to 80 per cent by the start of 2027.  

Matthew Fortier, CEO of the Accelerate alliance made up of a range of automotive, mining and battery firms dedicated to building Canada's EV supply chain, said the rule will benefit Canadian mines and battery plants.  

"Requiring EV batteries to contain materials from 'free trade' partners means more investment certainty for Canadian mineral and battery projects,” he said in an email to Automotive News Canada.  

Other battery components must also be built in North America for EVs to be eligible for the full incentive. The proposed legislation requires half of the components to be built in North America for vehicles put in service before 2024, with incremental steps up to 100 per cent of components at the start of 2029.  

Fortier said the evolution of the bill from its initial incarnation is a welcome development for Canada.  

"There is still work to be done to move this legislation forward but now it's oriented in the right direction. A lot of credit has to be given to our policy makers and diplomats on the ground, as well as to industry representatives who have been vocal and persuasive." 

DIFFERENT VIEWS ON INCENTIVES

Schumer and Manchin have staked out starkly different positions on the viability of electric cars. Schumer has called for all cars that are manufactured in the United States to be electric by 2030, while Manchin has called the idea of the federal government subsidizing EVs “ludicrous.”

Key details remain to be seen. In recent months, Manchin had been seeking stricter limits on the cost of eligible vehicles and for stricter limits on the income of those allowed to take advantage of the credit.

EV supporters in the United States have argued the tax credits are necessary to spur development of the nascent plug-in car market, which is seen as crucial toward reducing the use of fossil fuels and achieving Biden’s ambitious climate goals. If passed, the package would help replenish existing tax credits that have already been exhausted for some automakers.

Bloomberg News and the Associated Press contributed to this report.