Policy outlook for electric vehicles

Will the Inflation Reduction Act slow their roll?

The passage of the Inflation Reduction Act has plenty of implications for the economy, but one of the most-discussed is the effect it will have on the electric vehicle sector.

Does a requirement for EV batteries to be made domestically in order to qualify mean subsidies will have to wait until local production can catch up? And what does this mean for the battery sector? As the White House press release says, part of the plan is to “Support American workers with targeted tax incentives aimed at manufacturing U.S.-sourced products such as batteries, solar, and offshore wind components.” One of the possible effects of this could be a catch-up period where US-based production catches up with now-raised demand.

This does highlight one issue with green energy investing: many of the big companies in the market are based in China, Germany, Canada, and other big countries for green energy. US-based companies are out there, but not as dominant as in the fossil fuel sector. A look at the wind energy ETF with symbol FAN provides a good illustration: it takes a while scanning down the list of holdings before the first US-based company, Duke Energy.

So what will happen to a key driver of electric vehicle adoption: the tax credit? It appears that the credit can be up to $7500 for buying an electric car, with a number of restrictions: first, a means test on the buyer side to exclude people who make $150k per year or more. Next, on the seller side, the seller must meet certain US-made requirements to qualify for the full credit.

The policy aim of the Inflation Reduction Act for EVs appears to be incentivizing more electric vehicle production, in America, at prices that can be sold on the mass market. Barron’s was amplifying research claiming that the big winners of the bill appear to be Tesla (TSLA), Ford (F) and GM (GM). They are among the companies currently on the Energy Department list of qualifying vehicles with final assembly in North America, along with some models from Rivian (RIVN) and Lucid (LCID), and others. While it may prove disruptive in the short term, by handing out incentives the Inflation Reduction Act should help fund the switch to electric over time—which is something I still think is going to happen, even if the transition is being slowed right now by the war in Ukraine and disruptions from the pandemic.

Disclosure: Through personal holdings that I control and through investment LLCs in which I am a partner, I buy, hold, and sell stocks, bonds, ETFs, options, and cryptocurrencies, not limited to but including some of those discussed in this newsletter.