In 2024, fewer electric vehicles will be eligible for U.S. tax credits

Efforts to fight global warming could suffer a setback next year when new rules reduce the number of electric cars that qualify for a federal tax credit.

The credits, up to $7,500 per vehicle, have helped make electric cars more affordable, bringing the cost of some models below $30,000. Next year, for the first time, dealers will be able to give buyers the credit when they purchase a car, rather than requiring them to claim it on their tax returns.

But qualifying for the subsidy will become more difficult on January 1 due to Biden administration rules intended to encourage automakers to produce vehicles and components in North America, bypassing China. Most automakers are still years away from breaking their dependence on China for batteries and essential materials like refined lithium.

The stricter regulations, which stem from the Inflation Reduction Act, create another barrier to electric vehicles. Sales of such cars and trucks are already growing less quickly than a year ago because of high interest rates and drivers’ concern about finding charging stations.

Electric vehicles are still the fastest-growing segment of the auto industry, and Americans have already purchased more than a million of them this year. According to BloombergNEF, sales will increase another 32% in 2024, up from 47% in 2023. But Ford Motor, General Motors and Tesla have slowed investment as the pace of growth has cooled.

THE list of fully electric vehicles eligible for tax credits was already limited. Under rules that took effect this year, the credit was available only for cars made in North America.

To get the full credit, automakers must also meet quotas on the amount of battery components and some raw materials sourced from the United States or trading allies. Tesla, General Motors, Ford, Volkswagen, Rivian and Nissan are the only companies offering electric cars that qualify for at least a partial credit. Some plug-in hybrid cars from Audi, BMW, Chrysler, Jeep and Lincoln also benefit from tax breaks.

The new rules effective Jan. 1 add another set of restrictions, disqualifying vehicles containing components made in China or made elsewhere by a company under the control of the Chinese government.

“If it was already confusing for consumers, it becomes even more confusing,” said Kevin Roberts, director of industry insights and analytics at CarGurus, an online marketplace.

Tesla, which accounts for half of all electric vehicles sold in the United States, warned on its website that the least expensive Model 3 sedan and long-range version will no longer be eligible after Dec. 31. in China. Existing credits have brought the price of the base Model 3 down to around $30,000, on par with similarly equipped gasoline cars like the Toyota Camry or Honda Accord.

The tougher rules will also disqualify Ford’s Mustang Mach-E, which is eligible for half the credit and was the fourth most popular U.S. electric vehicle this year. Ford is still evaluating whether the F-150 Lighting, an electric pickup, will be eligible, a spokeswoman said.

The rules are complex and could still be changed by administration officials, creating confusion among industry leaders. In the worst case scenario, only a handful of vehicles will qualify.

Volkswagen said it is “cautiously optimistic” that its ID.4 electric SUV, made in Chattanooga, Tennessee, will continue to get the credit.

General Motors said it is evaluating whether its electric lineup, which includes the Chevrolet Bolt and an electric version of the Silverado pickup, will qualify. Nissan, whose electric Leaf is eligible for half of the $7,500 credit, did not respond to a request for comment. Rivian, whose electric pickups and SUVs qualified, also did not respond.

There is another way drivers can benefit from the credit. With an exception for businesses with fleets of vehicles, the Inflation Reduction Act allows dealers to apply the subsidy to leased vehicles and pass it on to customers. This has helped Hyundai and other foreign automakers remain competitive even if they don’t make electric vehicles and batteries in the United States.

More than 40% of Hyundai’s electric vehicle sales are made up of leasing, a spokeswoman said, compared with just 5% before the new restrictions took effect this year. The same legal provision allowed renters of cars produced abroad by Mercedes-Benz, BMW, Volvo and Polestar to indirectly receive the credit.

But leasing is not a panacea. Many people prefer to own their own cars, and foreign automakers are disappointed to have been left out of the subsidies available to buyers. Credit for electric vehicles “is overly complex and unfortunately creates confusion among customers and dealers,” Volvo Cars said in a statement.

But the lawmakers who drafted and passed the Inflation Reduction Act said they wrote it to force automakers to realign their supply chains. This is happening, but the changes will take time to bear fruit.

The list of eligible vehicles could grow throughout 2024 as automakers ramp up U.S. production to qualify for credits and other subsidies.

Korean automaker Kia plans to start producing the EV9, a seven-passenger electric SUV, at a plant in Georgia next year. Those vehicles assembled domestically should be eligible for half the credit, or $3,750, a Kia spokeswoman said.

Stellantis, which owns Chrysler, Dodge, Ram and Jeep, plans to introduce six mass-market electric vehicles in 2024, including Dodge Charger, Jeep Wagoneer and Ram pickup versions. The company did not say whether the vehicles will be eligible for credits.

Some hybrids, equipped with internal combustion engines and electric motors, will also be eligible if they meet the supply requirements and have a battery with a capacity of at least seven kilowatt hours.

The Chrysler Pacifica Hybrid will most likely still be eligible for a $7,500 credit, a company spokesperson said, while buyers of the Jeep Grand Cherokee 4xe and Jeep Wrangler 4xe hybrids should be eligible for up to $3,750.

Market forces are pushing electric vehicle prices lower, a trend that is expected to continue as automakers ramp up production. According to CarGurus, the average list price of an electric vehicle fell to $63,000 in November from $68,000 a year earlier. The average list price of an internal combustion engine vehicle was $48,000, the same as the previous year.

Federal subsidies and loans for battery factories and electric car plants are also helping to lower prices. Analysts predict that, at some point in the next few years, electric vehicles will become less expensive than internal combustion models, even without tax credits.

“The long-term trend will be to reduce prices,” said CarGurus’ Roberts. “You will see more traditional vehicles.”