According to a late Tuesday modification on Tesla’s website, the $7,500 federal tax credits for its Model 3 and Model Y electric vehicles are expected to be decreased after December 31.
“Customers who take delivery of a qualified new Tesla and meet all federal requirements are eligible for a tax credit of up to $7,500,” according to the website. “Reductions to the current federal tax credit are very likely after December 31.”
The EV tax breaks, combined with Tesla’s several price decreases, have helped the firm achieve record delivery numbers. If Tesla loses its tax credits, it can still rely on its tried-and-true (and contentious) price reduction, but analysts are concerned that such a strategy will have a negative impact on the company’s profitability.
Tesla did not explain why it expects to lose federal tax credits on its vehicles by the end of 2023, although it could be owing to the government’s decision to implement harsher battery regulations next year.
The tax credit is divided into two components, each of which is worth $3,750: a battery requirement and a vital minerals requirement. To qualify for the battery mandate in 2023, 50% of the vehicle’s battery must be constructed or manufactured in North America. Next year, that figure will rise to 60%.
To achieve the essential minerals criterion in 2023, 40% of the critical minerals in a car battery must be harvested or processed in the United States, or in a country with which the United States has a free trade agreement. By 2024, that figure will have risen to 50%. Furthermore, vehicles cannot obtain battery parts from a foreign country of concern, i.e. China, in 2024, and EVs cannot contain any essential minerals derived from China or other countries of concern in 2025 if they wish to retain their credits.
Tesla Model 3s are powered by batteries manufactured by the Chinese company CATL and the South Korean company Panasonic. The manufacturer has contracted with BYD, a Chinese automaker, to supply batteries for the Model Y.
The stringent standards are an attempt by the United States to reduce its reliance on China for battery manufacturing and parts. Despite billions of dollars in onshore investment from automakers and battery manufacturers, ending this reliance will be difficult.
Six of the top ten battery manufacturing businesses are situated in China, the country that dominates the production of cathode, anode, and refined battery materials. With 838 GWh capacity in 2022, China had more battery production capacity than the rest of the world combined. According to BloombergNEF data, this compares to the United States’ 70 GWh. The capacity of US battery production is predicted to double to 908 GWh by 2027, although this pales in comparison to China’s expected 600% increase.
The Tesla advisory could also be an effort to boost sales this year, urging people to get a Model 3 or Y in the next months while the full credit is almost guaranteed. In June, Tesla received approval for its Model 3s to be eligible for the full credit, rather than just half. Since the rules were implemented, all Model Ys have been eligible.