This issue brief contains a correction.
Investments made by the 2022 Inflation Reduction Act, the Infrastructure Investment and Jobs Act (IIJA), and the CHIPS and Science Act (CHIPS) have sparked an American manufacturing renaissance. Investment in new manufacturing capacity for zero-emissions vehicles, batteries, and critical minerals have jumped more than 100 percent, climbing from $15 billion in the year before Inflation Reduction Act’s passage to $35 billion in the year since its passage, according to the Clean Investment Monitor.*1 In the same time period, electric vehicles (EVs), including plug-in hybrids, have jumped from 4.4 percent2 to 9.9 percent3 of new passenger vehicle sales. Federal investments help domestic automakers increase their competitiveness and capture greater market share of this growing market, and American leadership in these key technology areas will provide opportunities to create good jobs,4 increase energy security, and reduce carbon pollution.
The U.S. manufacturing industry has the opportunity to leverage a variety of incentives to power the EV transition, for the sake of the climate, public health, and the automakers’ own future. EVs are the inevitable future of transportation, already constituting 14 percent of global vehicle sales in 2022—a figure that may hit 18 percent by the end of 2023.5 If American automakers fail to invest in EV innovation, this major pillar of U.S. economic and industrial strength will be overtaken by foreign competitors who are aggressively pursuing the EV revolution.6 The Inflation Reduction Act offers U.S. automakers a path of continued global relevance, and, fortunately, it seems to be working.
The Inflation Reduction Act and the IIJA collectively provide more than a dozen incentives and policy levers to move the United States forward on EVs and clean transportation. By simultaneously supporting the entire EV ecosystem—including manufacturing, adoption, and charging—these incentives advance a far more robust EV transition than any single tax credit, grant, or loan would on its own, and they help onshore the jobs in the growing EV market. Figure 1 illustrates how Inflation Reduction Act and IIJA programs work together to spur EV adoption and propel the United States to a leadership position on EV manufacturing. This brief then dives into the details of each of these critical tax credits before touching on these incentives’ impact so far.
45X advanced manufacturing production tax credit
The 45X advanced manufacturing production tax credit is the capstone of this soup-to-nuts approach, offering incentives at multiple steps in the EV supply chain that combine to strongly promote the development of a domestic clean energy manufacturing industry. First, 45X will pay for 10 percent of the costs any U.S. company incurs to produce any one of 50 specific critical minerals, from aluminum to zinc; these are essential raw materials for building a clean energy economy,7 particularly batteries.
In the case of battery manufacturing, these critical minerals are then used to create electrode active materials—that is, the anode and cathode materials that make up batteries—for which 45X offers another credit worth 10 percent of domestic production costs. This credit is estimated to amount to approximately $6 per kilowatt-hour (kWh) for the average EV battery.8
Electrode active materials, in turn, are one of the key inputs into battery cells, the smallest functional unit of a battery. Here, the 45X credit offers another incentive worth $35 per kWh for every battery cell produced.
Finally, battery cells are combined into battery modules, for which 45X offers a final incentive worth $10 per kWh for every battery module produced. Combined, 45X offers an incentive of at least $45 per kWh of battery capacity for an EV, not including the credits for critical minerals and electrode active materials.
Batteries that are installed on the electricity grid are offered additional credits, including the Section 489 investment tax credit for clean electricity sources. Many other batteries will be used in EVs, for which additional incentives are available, depending on whether the vehicle is purchased new, used, or leased, as described below.
Onshoring success of the 45X tax credit
The 45X tax credit’s success in incentivizing onshoring can be seen in estimates of its long-term fiscal impact, which is significantly greater than any other single Inflation Reduction Act EV credit.10 The Joint Committee on Taxation (JCT) estimates that the 45X tax credit will yield up to $134.9 billion in savings for clean technology manufacturers between 2022 and 2031.11 This is 426 percent over the JCT’s original estimation of $30.6 billion in August 2022.12 While the 45X tax credit is not limited to batteries, EV and battery investments constitute approximately 87 percent of clean energy investments made since the passage of the Inflation Reduction Act, between the third quarter in 2022 and the second quarter in 2023.13 In terms of expected savings, the 45X tax credit is the largest EV-related tax credit in the Inflation Reduction Act, making up more than 60 percent of total savings from EV-related credits,14 or $134.9 billion of $219.2 billion, according to the JCT’s estimations. The JCT estimates the 30D new clean vehicle credit combined with the 45W commercial clean vehicle credit will provide $74.7 billion in savings, the 25E previously owned clean vehicle credit $741 million, and the 30C charger credit $1.3 billion.15
30D new clean vehicle credit
The 30D new clean vehicle credit, newly revamped by the Inflation Reduction Act, now offers up to $7,500 for the purchase of a new EV, provided that a host of sourcing and other requirements are met. Specifically, half the credit is available for EVs that meet sourcing requirements for batteries, and the other half is available for those that meet sourcing requirements for critical minerals. These requirements provide manufacturers with an additional incentive to onshore their operations and related supply chains and discounts for American consumers to buy domestically made vehicles.16
Upcoming U.S. Treasury Department guidance on the credit’s “foreign entity of concern” restriction is likely to hasten the onshoring or friend-shoring of supply chains.17 The Inflation Reduction Act specifies that, starting in 2024, no EV that contains battery components produced by a foreign entity of concern18—defined as China, Russia, Iran, and North Korea—will be eligible for the credit.19 Beginning in 2025, the same becomes true for critical minerals used in EV batteries.20 Because large portions of the global economy today rely upon critical minerals that are processed in China, including those used not just for EVs but also for smartphones,21 medical implants,22 and various defense technologies,23 this new provision is likely to cause many vehicles to become temporarily ineligible for the 30D credit beginning in 2024, until automakers shift their supply chains.24 In this case, the 30D credit will become an incentive not just to increase EV sales, but also for automakers to support their supply chains that include critical minerals to break free of China’s chokehold—an economic development that would support many sectors of the modern economy beyond EVs. Once supply chains diversify, the 30D credit will return to being an important sales incentive for those EVs, but it is only one component of support for the EV transition. The 30D credit is expected to provide approximately $74.7 billion25 in federal investment from 2022 to 2031, far less than the 45X tax credit’s $134.9 billion.26
45W commercial clean vehicle credit
Supplementing the 30D credit for the purchase of new EVs for personal use, the Inflation Reduction Act also offers the 45W commercial clean vehicle credit for the purchase of new EVs that are then leased to consumers or used for other commercial purposes. The 45W credit provides up to $7,500 for businesses and certain tax-exempt entities that purchase an EV, whether to use it for their own commercial purposes or to lease it to a consumer.27 The 45W credit does not include the same sourcing requirements as 30D, and, following the passage of the Inflation Reduction Act, leasing climbed from less than 10 percent of EV sales in 2022 to 35 percent of EV sales as of March 2023.28 However, the 45W incentive is not expected to derail the push to onshore supply chains or the EV transition for two reasons. The first reason is, simply, scale: The 45X credit provides a much more significant incentive, in terms of expected savings, than the 45W credit, and it can only be obtained by U.S.-based manufacturing. The $92.3 billion of announced investments in domestic EV and battery manufacturing, stimulated by the 45X tax credit, offers strong evidence to this end.29 If manufacturers were content with just the 45W credit, manufacturers would not be rushing to onshore their operations. Second, the credit phases itself out by design. The Inflation Reduction Act specifies that the credit amount will cover the difference in cost of the EV relative to a comparable internal combustion engine (ICE) vehicle, up to a maximum of $7,500.30 For 2023, the U.S. Department of Energy (DOE) and the IRS determined that almost all EVs have a large enough cost difference to earn the full $7,500.31 However, as EV price parity with ICE vehicles approaches, and may come as soon as 2025, the credit amount will fall off significantly.32 This creates an important incentive for automakers to begin addressing any supply chain issues now in order to maintain or gain access to the 30D tax credit in the mid-2020s.
25E credit for previously owned clean vehicles
The 25E credit for used EVs will also complement domestic EV manufacturing, offering up to $4,000 for the purchase of certain used EVs by low-income households. While offering less per vehicle than the 30D and 45W credits, the 25E may well be the most significant in driving EV adoption, as the used car market is significantly larger than the new car market: Approximately 19.1 million33 used vehicles were sold by U.S. dealerships in 2022, compared with approximately 13.7 million34 new vehicles. The used market is also where actual vehicle turnover happens, with some vehicles eventually being scrapped rather than being resold to another driver. Increasing the portion of used vehicle sales that are EVs will help shift the actual makeup of the U.S. automotive fleet. The 25E credit may also indirectly benefit domestically manufactured vehicles, as the credit is limited to vehicles resold for $25,000 or less,35 a price point that will be easier to hit with the 45X and 30D credits, driving down the overall price of domestically produced EVs.
Charging infrastructure deployment incentives
Underpinning these incentives for EV production and adoption are two additional tax credits and a host of grant and loan programs that further incentivize EV adoption and manufacturing onshoring. These include EV charger deployment benefits from the 30C tax credit and the National Electric Vehicle Infrastructure (NEVI) program established by the IIJA. In addition, the 30C alternative fuel vehicle refueling property credit offers households up to $1,000 and businesses up to $100,000 per charger, provided the chargers are located in a nonurban census tract.36 The NEVI program complements this effort to build chargers along highways by allocating $5 billion to states over five years to build out a nationwide charging network.37 Progress is already being made, with the Joint Office of Energy and Transportation approving all initial state NEVI plans in September 2022.38 Chargers funded by the NEVI program are also subject to certain buy-America requirements, another onshoring incentive.39
Other funding opportunities
The above onshoring incentives are complemented by the 48C investment tax credit (ITC) and the DOE’s grant and loan programs. The 48C ITC functions as a precursor to the 45X credit, defraying the cost of investment before the facility becomes eligible to receive credits under 45X.40 The DOE’s grant and loan programs function similarly, providing funding upfront for investments in manufacturing facilities and related supply chains. The DOE’s Advanced Technology Vehicles Manufacturing (ATVM) Loan Program is the largest of these incentives, with lending authority of approximately $55.1 billion as of August 2022, after the Inflation Reduction Act lifted its lending cap.41 Recent and announced recipients of ATVM financing include $2.5 billion to Ultium Cells for battery manufacturing42 and $2 billion to Redwood Materials for battery recycling.43
The Inflation Reduction Act also established the Domestic Manufacturing Conversion Grants Program under the DOE’s Office of Manufacturing and Energy Supply Chains. This program makes $2 billion in grants available in order to retool soon-to-close or recently closed facilities to produce EVs or related components, keeping facilities and jobs intact.44 Other grant programs include the Battery Materials Processing Grants Program,45 the Battery Manufacturing and Recycling Grants Program,46 and the Advanced Energy Manufacturing and Recycling Grant Program.47 Combined, these programs help fill gaps in the EV ecosystem and strategically complement private investment, defraying domestic manufacturing costs by hundreds of billions of dollars.
The above programs have already been effective in spurring investment in domestic EV manufacturing. $92.3 billion in investments in EV and battery manufacturing have been announced48 for projects that will create approximately 84,800 jobs.49 Inherent in these investments is the diversification of EV supply chains away from China’s current dominance.50 Investments in U.S. battery manufacturing are anticipated to lead to battery manufacturing capacity sufficient to support more than 12 million new EVs per year in 2027.51 Meanwhile, the United States is negotiating critical mineral agreements52 and engaging partners through the U.S. Department of State’s Minerals Security Partnership project to ensure reliable critical mineral supplies and a diversification of the critical mineral mining industry.53 These efforts are also an opportunity to strengthen labor and environmental protections in an industry that has historically evaded them.54
$92.3 billion in investments in EV and battery manufacturing have been announced for projects that will create approximately 84,800 jobs.
Given the above incentives, and growing consumer demand,55 EV sales are expected to grow significantly in the United States, projected to constitute 67 percent of all light-duty vehicle sales by 2032.56 Such a transformation will have a major impact on U.S. greenhouse gas emissions,57 to which the transportation sector is the single largest contributor.58 The EV transition will also bring massive health benefits due to reductions in local air pollution, with the American Lung Association finding that eliminating all emissions from light-duty vehicles and the power sector would avoid 89,300 premature deaths by 2050.59
With IIJA and Inflation Reduction Act incentives providing wind at their backs, and EV sales growing faster than predicted, the time is now for U.S. automakers to embrace the clean technology and clean industry future. The Inflation Reduction Act’s incentives provide support at every stage of the manufacturing process, from raw material to final EV, incentivizing manufacturers at each step to onshore their operations in the United States. These comprehensive policies support domestic economic and energy security and a renaissance in American manufacturing.
* Correction, November 29, 2023: This brief has been updated to accurately state the percentage and dollar increases of investments in new manufacturing capacity for zero-emissions vehicles, batteries, and critical minerals.