How one change to a U.S. EV tax credit likely saved Canada's auto sector

An about-face in U.S. policy means electric vehicles made in Canada will now qualify for hefty consumer tax credits when sold in the United States, a provision in a proposal that is being lauded by auto industry executives on this side of the border.

Under a previous proposal, the tax credits would have applied only to vehicles assembled in the United States. The policy change averts potential trade disputes and clears a hurdle in the path of Canada’s EV industry.

“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 (CVMA), which represents the interests of the Detroit Three in Canada.

“The emphasis on North American-produced vehicles underscores the integrated nature of the automotive industry.”

The US $739-billion bill overcame its biggest hurdle Aug. 7, when it was passed by the Senate. It will likely be signed into law.

The legislation stemmed from a deal struck July 27 by two top Democratic negotiators, Senate Majority Leader Chuck Schumer of New York state and Sen. Joe Manchin, the conservative West Virginia Democrat who rejected President Joe Biden’s earlier drafts but surprised colleagues with a new one.

The Democrats’ 725-page Inflation Reduction Act of 2022 would spend $369 billion over the decade on strategies to fight climate change, 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 power, both seen as ways to support industries that can help curb U.S. dependence on fossil fuels.

Most important for the Canadian auto industry, there are incentives for buying EVs, including a $4,000 tax credit for the purchase of used EVs and $7,500 for new ones.

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

The new bill is littered with references to tax credits applied to North American vehicles.

INDUSTRY, GOVERNMENT LOBBIED HARD

The deal averted a “trade war,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association (APMA). The previous Biden proposal “illegally excluded Canada-made vehicles,” Volpe said.

“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,” he wrote in a July 27 tweet.

Volpe was among a steady stream of Canadian government and industry officials who lobbied hard against Biden’s idea of applying tax credits only to U.S.-made EVs. Excluding Canada-made vehicles, Volpe said, “was against the core principles” of the USMCA and was “especially harmful to American carmakers in Canada who sell almost exclusively to Americans.”

Francesco Sorbara, 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 the Biden administration allowed unionized automakers to offer an additional $4,500 to EV buyers. The provision was opposed by Manchin amid strong blowback from companies such as Tesla and Toyota, which argued that provision would have given an unfair advantage to their Detroit-based rivals.

EV BATTERY PROVISIONS

While the current 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 recycling operation within North America.

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 2027.

That rule will benefit Canadian mines and battery plants, said Matthew Fortier, president of the Accelerate alliance of automotive, mining and battery companies dedicated to building Canada’s EV supply chain.

“Requiring EV batteries to contain materials from ‘free trade’ partners means more investment certainty for Canadian mineral and battery projects,” he wrote 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.

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

“A lot of credit has to be given to our policymakers and diplomats on the ground as well as to industry representatives who have been vocal and persuasive.”

The bill is expected to be passed by the U.S. House of Representatives on Aug. 12, which would send the bill to the White House for Biden’s signature, enacting it into law.