US tax rules aim to boost local battery investment—and exclude China

The US government aims to boost investment in the country’s battery industry by disallowing tax credits for electric vehicles if battery components were made by Chinese companies. The US hopes that defining a limited role for China will provide the clarity that companies need to move forward with projects, but, conversely, analysts warn that cutting firms off from Chinese expertise could restrict the US industry’s growth.

The Inflation Reduction Act (IRA), passed in 2022, allows drivers buying an electric car to claim up to $7,500 in tax credits if a certain portion of its battery’s components come from the US or allied countries. But starting next year, batteries don’t qualify for the credit if making them involves a “foreign entity of concern.” The IRA didn’t clearly define that term initially, which made it risky for car and battery makers to proceed with some US projects.

The US government is now providing a more explicit definition. In a recent update to proposed rules, the US says most Chinese-made battery components will disqualify cars for tax incentives, as will battery parts made by companies headquartered or incorporated in China.

In addition, a company’s products won’t qualify for tax credits if the Chinese government or government officials control 25% or more of the company. The rules also limit how much battery firms can cooperate with Chinese companies through licenses or contracts. The proposal also applies to Iran, North Korea, and Russia, but those countries have little battery expertise.

The rules don’t lock out Chinese firms completely. The origin of inexpensive battery components—such as, electrode binders, electrolyte additives, and minerals in electrolyte salts—may not affect a car’s tax credits, at least for now.

Still, the rules will make it difficult for cars to qualify for US tax credits because most battery cells and cathode and anode materials are made in China, according to a 2022 analysis from the International Energy Agency.

China is also using regulations to influence battery production. On the same day that the US updated its proposed rules, China started restricting exports of materials for graphite anodes, nearly all of which are made in China.

Aaron Brickman, a US policy analyst at the climate-focused think tank RMI, says precisely defining “foreign entities of concern” gives battery makers and carmakers the clarity needed to move forward with plans in the US. Brickman expects the rules to fuel the growth of the US electric vehicle industry, which has attracted more than $100 billion in announced investments since the IRA passed, according to the White House.

“A business craves predictability and transparency and certainty,” he says. “Companies just want to know what’s expected of them.”

Jane Nakano, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies, says the definition of “foreign entities of concern” is on the stringent end of what she expected. It mirrors the standards set in the CHIPS and Science Act for the semiconductor industry, even though China’s role in the battery supply chain is much larger than its presence in semiconductors.

Nakano agrees that the rules, if enacted, will be a boost for US battery investment. But she notes that they also raise questions about where US companies will get battery-related expertise, which is concentrated in China.

Some companies are hoping to partner with Chinese firms. For example, Ford Motor is pursuing a pact with China’s Contemporary Amperex Technology Co. Limited (CATL) to build a battery factory in Michigan, a plan that some US lawmakers have criticized. Freyr Battery recently told investors that it may seek to license technology from an outside firm to build its battery factory in Georgia, despite geopolitical risks.

Nakano sees a narrow path that would allow firms to license technology from China and still qualify for tax credits. Partnerships would need to meet certain conditions, such as ensuring non-Chinese companies have unfettered access to production sites and can determine the amount of materials made and their final use. “That could be a really balancing force that could help the US,” she says.