Federal EV and battery subsidies may cost US$575 billion more than budget as tax credit recipients multiply
New analysis of the Inflation Reduction Act's green energy incentives shows that the IRA may be a victim of its own success, and makes the final Treasury guideline on which batteries and electric vehicles would qualify all the more important to hear. According to Goldman Sachs calculations, the new EV tax credit expenditures alone would cost US$379 billion more than the IRA's projections. The 35 cents subsidy per kWh of made-in-US battery capacity would load the US taxpayer with $196.5 billion more than envisioned, too, as per the Mercatus Center analyst Christine McDaniel.
The total cost of the Inflation Reduction Act's green energy production and transportation incentives would end up being $1.2 trillion by 2032 when the tax credits expire, claims Goldman. This is in stark contrast with the government's own $391 billion estimate.
When the IRA provisions passed, a global outcry against its unfair competition practices quickly followed from stakeholders in Europe, Japan, or Korea. Europe even pondered suing the US for breaking the WTO rules against direct government subsidies that put other members at a disadvantage. The Treasury Department then postponed its final guidelines on battery and raw materials sourcing to analyze the input from all stakeholders, foreign and domestic.
In the meantime, however, it allowed even cars with Chinese batteries like CATL's LFP cells in the standard range Model 3 or Model Y, to be eligible for the full $7,500 tax credit. This prompted Senator Joe Manchin to introduce the American Vehicle Security Act which asks that the spirit of the IRA's original subsidy requirements be kept to the letter.
The Treasury will have its final say next week, and might confirm that only made-in-US batteries, assembled with raw materials sourced from countries the US has free trade agreement with, would qualify. That excludes China, so Tesla now warns that once the Treasury releases its subsidy eligibility guidelines, the base Model 3 and Model Y may lose their US$7,500 tax credit rights.
The Goldman Sachs analysis, however, cites exactly oversights like expanded vehicle eligibility as the reason that the IRA tax credit might be three times over budget when it expires. Moreover, the battery factory incentives are making companies like Volkswagen swap their European plans for North America, lured by the potential to receive US$10 billion in total subsidies. LG also took its $6.4 billion Arizona battery factory out of the freezer, and said it will be making LFP and 4680 cells there. Ford will be getting $1.5 billion annually for its own battery factory on US soil, too, as CATL will provide the know-how and equipment.
Even Tesla is gearing up to benefit greatly from the government largesse beyond EV sales, and will get at least $3.5 billion annually for its 100 GWh 4680 cell factory expansion at Giga Nevada. All of that extra expenditure is already spearheading the transition to electric vehicles and attracting billions of battery investment that may have gone elsewhere, but it could come at a greater cost than the US government originally budgeted for.