Jennifer Safavian | On the One Year Anniversary of the IRA, It’s Too Soon to Declare Success

The transition to electrification is the most significant transformation for the U.S auto industry since the Model-T. The monumental operational shifts the industry is undertaking will completely reshape global automotive supply chains, production lines, and consumer perspectives.

It’s been a year since the Inflation Reduction Act (IRA) became law. This sweeping legislation has had a tremendous impact on the U.S. automotive industry and has touched nearly every part of our sector, from sourcing raw materials all the way to consumers driving new cars off dealer lots. So, it begs the question, has this transformation benefited from the IRA?

On the manufacturing side, the IRA created many incentives that are encouraging a rapid build-out of America’s EV supply chain, and many of our allies and partners are following suit. Due to provisions such as the 45X Advanced Production Credit, many investments in batteries and materials had their timeframes moved up or were created whole-cloth to benefit from the credit. Benchmark Materials, an analysis group specializing in EV materials and supply chains, noted that since the passage of the IRA, the United States forecasted 2030 battery production capacity increased 67% due to these announced investments.

However, on the consumer side, it’s unclear if the IRA will have a similar beneficial impact. The 30D Consumer Clean Vehicle Credit has a slew of stipulations and requirements that leave only a few vehicles eligible for the tax credit, and the industry is still waiting for finalized guidance on material sourcing requirements. Currently, only 18 EV models out of over 90 available on the market are eligible for the 30D tax credit. That’s less than 20%. Granted, additional credit-eligible EV models will be hitting the U.S. market at the end of this year, with many more to follow over the coming decade. But, how the introduction of these models impacts the overall effectiveness of this credit remains to be seen.

Additionally, only buyers who are below income thresholds, which are static and not indexed to inflation, are eligible to claim this credit. Based on consumer surveys of EV buyers, many of these credit-eligible buyers are not the primary purchasers of EVs in today’s market.

EV market share of the U.S. new vehicle market has increased from around 7% in 2022 to approximately 8.5% so far this year, based on preliminary data. That’s good progress, but it is a lower growth rate than we have previously seen over the last several years. This is during the year when the IRA’s provisions are the least stringent and before inflation has had a chance to chip away at the pool of credit-eligible buyers and the value of the 30D credit itself.

Additionally, we do not yet know whether buyers were incentivized to purchase an EV due to the 30D credit or the 45W Commercial Clean Vehicle Credit, which consumers may utilize on a leased EV to reduce monthly payments. The 45W credit does not have the same stipulations as the 30D credit, allowing a broader range of consumers a full slate of EV options to choose from and receive a benefit. If the 45W credit has been a better tool for incentivizing EV acceptance, that’s not the best news for the IRA’s long-term impact on adoption rates, as this credit was written to diminish in value over time.

We hope that the IRA is successful at increasing EV adoption rates and supporting the industry as it endeavors to make this electrification shift. However, with only one year of the IRA behind us, it’s just too soon to determine whether the law has been a success at accomplishing its admirable goals or fell short of what’s needed.