US House reconciliation bill would end EV subsidies, alter key clean energy tax credits

A US House of Representatives reconciliation proposal would end most electric vehicle subsidies and phase out or alter several key clean energy tax credits, while leaving the 45Z credit for biofuels producers in place.

The House Ways and Means Committee's proposed portion of Republicans' larger budget bill, revealed May 12, will be subject to committee debate and a wider tax fight yet to play out on Capitol Hill. But the text offered a first glimpse, long awaited by industry, of the potential fates awaiting Inflation Reduction Act tax credits.

As expected, the bill would terminate significant electric vehicle tax credits, which former US President Joe Biden and a Democratic Congress passed in their attempts to spur EV adoption in 2022. It would also end the energy efficient home improvement credit, the residential clean energy credit, and the new home energy credit.

Somewhat less expectedly, the bill proposes to sunset clean hydrogen production tax credits at the end of this year, seven years ahead of schedule.

The committee cast a more forgiving eye toward other credits, however.

Alongside minimal changes to 45Q, which incentivizes carbon capture and storage, it would keep and extend the crucial 45Z clean fuel production credit – a relief for beleaguered US biofuels producers and the nascent sustainable aviation fuel industry – while gradually phasing out clean electricity and nuclear energy subsidies.

EV sea change

The Ways and Means Committee's language could dramatically alter consumer incentives for electric vehicles. Since 2022, the US Treasury Department has provided EV buyers a tax credit of up to $7,500 based on the consumer's income status and the location of the vehicle's assembly, among other qualifications. Republicans have criticized the policy, alongside Biden-era rules for tailpipe emissions and corporate fuel economy standards, as a de facto "EV mandate" that restricted consumer choice.

If passed, the new clean vehicle credit would only apply to vehicles for which automakers have sold fewer than 200,000 units.

Passenger electric vehicle sales reached 114,000 units in February, up 4.2% year over year, S&P Global Commodity Insights analysts wrote in an April 30 edition of the EV Essentials report. The EV market share slid slightly to 9.4%.

"The global EV market has become more shaped by regulatory uncertainty and trade tensions, increasingly leaving adoption to consumer preference," the analysts said.

Phasedowns for clean energy credits

The bill would start to phase out the IRA's zero-emission technology energy production tax credit (45Y) and investment tax credit (48E) for projects placed into service beginning in 2029.

Under the IRA, the two credits were designed to phase out over a four-year period starting in 2032, or when US greenhouse gas emissions from electricity production decline 25% or more from 2022 levels – whichever comes first.

The IRA's 45Y production tax credit starts at 0.3 cents/kWh and can increase to 1.5 cents/kWh for projects that meet prevailing wage and apprenticeship requirements. The law's technology-neutral investment tax credit offers an initial 6% deduction on a project's property basis, with a potential 30% bonus rate provided the same labor requirements are met.

The May 12 draft committee bill would implement a 20% phaseout for the 45Y and 48E credits starting in 2029, followed by a 40% phaseout in 2030, 60% phaseout in 2031, and full phaseout for projects placed into service in 2032 and later.

The IRA's nuclear production tax credit (45U) would be subject to the same phaseout approach.

The IRA's transferability provisions for the 45Y and 48 E credits – which allow nonprofit and tax-exempt entities to realize the full cash value of the credits – would be repealed for projects that start construction two years after the bill's date of enactment. Transferability for 45U would be repealed starting in 2028.

In addition, the bill would completely end the IRA's advanced manufacturing production credit (45X) for components sold in 2032 and later. Wind energy components would no longer be eligible for 45X starting in 2028. The draft bill would also repeal transferability for 45X starting in 2028.

The bill would also repeal transferability for the IRA's carbon capture and sequestration tax credit (45Q) for equipment commencing two years after the bill's enactment.

Furthermore, the draft proposal would bar credit-eligible projects from receiving "material assistance" from "prohibited foreign entities" and "foreign-influenced" entities, as defined by the 2021 and 2024 national defense authorization bills. The bill also specifically targets entities identified as a "Chinese military company" operating in the US.

Win for biofuels producers

The committee's legislation extends the 45Z credit until 2031. It also bans the use of feedstocks sourced outside the US, Mexico and Canada – like used Chinese cooking oil – for producers hoping to qualify for the credit.

The bill would also slightly rewrite the credit to exclude the effects of indirect land use changes in lifetime greenhouse gas emissions calculations.

The 45Z credit was originally designed to incentivize the domestic production of fuels with 50% lower lifecycle greenhouse gas emissions than petroleum. Any fuel that is suitable for use in a highway vehicle or aircraft is eligible if it meets emissions reduction requirements.

According to the Congressional Research Service, the existing credit scales beyond the 50% reduction threshold, up to a maximum of $1/gal for non-aviation fuel and $1.75/gal for aviation fuel. Producers that reduce carbon intensity scores beyond 50% are eligible for an additional 2 cents per point of carbon intensity reduction.

The specifics of those calculations, particularly how so-called "climate-smart" agricultural techniques would be scored, were the subject of intense lobbying by ethanol and biofuels groups throughout 2024, as industry sought increased access to the credit and the Biden Treasury Department delayed detailed qualification guidance.

The Ways and Means Committee, chaired by Jason Smith, Republican-Missouri, is scheduled to debate and mark up its portion of the reconciliation bill May 13.