Tesla Model 3 Highland may not qualify for full tax credit in 2024 as battery material requirements rise

A few weeks after Tesla managed to wiggle the base Model 3 as eligible for the full new EV tax credit amount of the federal government, despite its made-in-China LFP battery pack, it is now warning that the subsidy party may end in six months. All Model 3 versions enjoyed a generous US$7,500 subsidy in the form of tax credits while waiting on the Treasury Department's guidelines on how to read the eligibility requirements in the Inflation Reduction Act (IRA) that introduced the credits in January.

In March, the Treasury confirmed the IRA's stipulations that half of the battery pack value has to come from production or assembly in North America to nab $3,750, or half of the federal new EV tax credit. To qualify for the other half, 40% of the materials that go into the EV's battery cells have to be sourced from the US, or its free-trade partner countries, excluding China. That made the base Model 3 ineligible for the battery materials half of the subsidy after April 18, as its LFP pack is made by the world's largest EV battery maker CATL.

Tesla, however, apparently argued to spread the critical materials and assembly requirement percentages over its entire batch of Model 3 sales, thus managing to stay above the threshold for tax credit eligibility. Last month, it informed its customers that all of its Model 3 versions are again qualifying for the full $7,500 amount, inducing a buying frenzy that led to record vehicle deliveries this past quarter.

The battery assembly and material sourcing requirements, however, rise by 10 percentage points each year, and it seems that Tesla won't be able to deliver a Model 3 production mix to keep it eligible for the full subsidy amount next year. It just changed the wording on the Model 3 purchase site to reflect that "all new Model 3 vehicles currently qualify for a federal tax credit for eligible buyers," as before, but warn that "reductions [are] likely after Dec 31." Unfortunately, that goes for both the cheapest Model 3 with LFP battery, and for the more expensive ones that don't come with CATL's phosphate cells.

Tesla is preparing to introduce a Model 3 Highland refresh which is expected to be powered by a better M3P version of CATL's phosphate batteries with added manganese. The larger 66 kWh pack, however, will likely still be sourced and produced mainly in China, which could make the whole Model 3 product mix see its US subsidies cut in half in 2024.

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