U.S. to Limit China’s Ability to Benefit From Electric Vehicle Industry

The Biden administration proposed new rules on Friday aimed at shifting more production of electric vehicle batteries and the materials that power them to the United States, in an attempt to build up a strategic industry now dominated by China.

The rules are meant to limit the role that Chinese firms can play in supplying materials for electric vehicles that qualify for federal tax credits. They will also discourage companies that seek federal funding to build battery factories in the United States from sourcing materials from Chinese partners.

The rules could cause some consternation among automakers, who continue to rely heavily on China for materials and components of electric vehicles. They are also facing intense cost pressures as they try to modify their factories to make electric cars, and China offers some of the most advanced and lowest-priced battery technology in the world.

The Biden administration is attempting to use billions of dollars in new federal funding to change that dynamic and create a U.S. supply chain for electric vehicles, through both carrots and sticks.

The climate law President Biden signed in 2022 includes up to $7,500 in tax credits to consumers who buy electric vehicles made in the United States, using largely domestic materials. The law also included a general ban on Chinese products. Lawmakers mandated that firms in China, Russia, North Korea and Iran be prohibited from providing certain materials to cars that received those tax breaks.

But the law left open several questions, including what constitutes a Chinese or Russian company. Administration officials said those definitions include any entity incorporated or headquartered in China or Russia, as well as any firm in which 25 percent of the board seats or equity interest were held by Chinese or Russian governments.

The law also requires battery makers that strike contracts or licensing agreements with Chinese firms to ensure that they are retaining certain rights over their projects. That provision is intended to make sure a Chinese firm is not effectively in control of such a project.

Some conservative lawmakers had challenged Ford Motor’s plans to license technology from the Chinese battery giant known as CATL for a plant in Marshall, Mich., arguing that such a partnership should not be eligible for federal tax credits.

In a letter to the administration in November, Senator Joe Manchin III, the West Virginia Democrat, urged the Treasury Department to adopt the “strictest possible standards” to bar Chinese companies from the incentive programs.

The rules kick in for battery components in 2024, and in 2025 for critical minerals like lithium, cobalt and nickel. They will remain open for public comment for several weeks and could be adjusted depending on the views of industry.

Auto industry lobbyists have warned that extremely strict rules could throttle electric vehicle sales. But Paul Jacobson, the chief financial officer of General Motors, said the company had structured its electric vehicle operations to be successful regardless of the federal rules.

“We’re not anchoring the business on saying this has to happen” with regard to regulations, Mr. Jacobson told reporters on Thursday. If regulations change, he added, “it’s not a backbreaking thing for us.”

The administration said it would offer some temporary exemptions through 2026 to the strict sourcing requirements for less valuable components of batteries that are now difficult for automakers to trace.

Wally Adeyemo, the deputy secretary of the Treasury Department, said in a briefing with reporters that the rules would help advance the administration’s goals of building up an American clean energy supply chain while also cutting emissions in the transportation sector.

“Automakers have already adjusted their supply chains to ensure buyers are eligible for these credits,” he said. “These changes take time, but companies are making the investments and Americans are buying these cars.”

Over the past year, companies have invested $213 billion in the manufacturing and deployment of clean energy, clean vehicles, building electrification and carbon management technology in the United States, according to tracking by the Rhodium Group and the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology. That is a 37 percent increase from a year earlier.

Companies are also investing in factories and technologies aimed at developing the materials needed for electric vehicle batteries and other components, including in North Carolina, where several firms are trying to restart the lithium industry.

Eric Norris, the president of energy storage at Albemarle Corporation, the world’s largest lithium producer, said in an interview this week that the rules of the Inflation Reduction Act make the lithium that his company is producing in the United States more valuable.

“In fact, one could argue that product even has a premium value relative to product sourced from Asia because it enables a financial benefit that otherwise wouldn’t exist,” Mr. Norris said.

Still, the global electric vehicle industry remains heavily anchored in China, which is the world’s largest producer and exporter of electric vehicles. China produces about two-thirds of the world’s battery cells, and refines most of the minerals that are key to powering an electric vehicle.

John Podesta, a senior White House adviser on clean energy, said Wednesday that China processes a majority of lithium and cobalt, as well as almost 90 percent of global graphite, “and they completely outpace the U.S. and our allies on the production of batteries and their components.” But because of the administration’s investments, he said, “we’re rewriting that story.”

China’s dominance of critical mineral supply chains has raised concerns that Beijing could move to cut the United States off from materials that are critical for not just cars but also jet engines and munitions.

Others have raised concerns about poor working conditions, the use of child labor and a lackluster environmental record of critical mineral supply chains that run through countries like the Democratic Republic of Congo and Indonesia.

Companies that set up mining, refinery and battery-building operations in the United States and allied countries would be required to adhere to much higher labor and environmental standards — and meeting those requirements would come at a cost, said Bryce Crocker, the chief executive of the Australian mining company Jervois.

Jervois was constructing what would be the United States’ only mine for cobalt, in Idaho. But the company paused construction in March after the global price of cobalt plummeted. Mr. Crocker attributed the collapse to a flood of cobalt produced by Chinese-owned companies that had been heavily subsidized by the state.

Mr. Crocker said on Thursday that the Treasury Department rules could have an impact on his business, but that they were awaiting the government’s guidance.

Battery makers in Japan and South Korea have also been anticipating the rules because their supply chains are often closely integrated with China’s.

The rules also appear to prohibit automakers from sourcing nickel used in their batteries from Russia, which is one of the world’s largest nickel producers.

One of the challenges for automakers will be developing systems to track all the components of their battery through a long and often opaque supply chain.

Todd Malan, the chief external affairs officer for Talon Metals, which is seeking approval for a nickel mine in Minnesota, said that strong rules could help prevent “mineral laundering” schemes in which Chinese or Russian minerals would be routed through facilities in friendlier countries.

The rules would need to be enforced by audits and clawbacks of awards if companies violate them, and firms would also need to adopt “know your supplier” systems that could track inputs from the mines through to recycling programs, Mr. Malan said.

In its announcement, the Treasury Department said that vehicles that were reported incorrectly would be subtracted from an automaker’s eligibility for tax credits, and that automakers who committed fraud or intentionally disregarded the rules could be declared ineligible for the credit in the future.