Original publication in Boomberg Law February 25, 2022
The House passed the Build Back Better Act. It proposes to increase tax credits for electric cars in a way that favors American-made and union-built EVs. Akin Gump lawyers warn that the proposal could be in violation of international trade agreements. They also caution against trying to link other policy objectives with climate change measures. They suggest some policy alternatives.
As lawmakers continue to devise ways to achieve climate change mitigation and environmental policy priorities they must also consider U.S. international trading obligations that could prevent the implementation of proposed measures.
To ensure compliance with international trade regulations and to achieve the desired climate change outcomes, lawmakers must draft all environmental measures solely with the intent of promoting and achieving these objectives.
In the House-passed version of the Build Back Better (BBB) Act, Democrats—in a purported effort to promote green technology and cut emissions—proposed raising the federal electric vehicle (EV) tax credit from the existing maximum credit of $7,500 to a maximum credit of $12,500, provided that (among other requirements) the consumer purchases a qualified EV manufactured in an American factory where workers are represented by a union and the car’s battery meets domestic content requirements.
The maximum credit is only $8,000, however, if the vehicle is not finally assembled at a unionized U.S.-plant, and only $7,500 if the car’s battery is not U.S.-made. Additionally, credit eligibility for imported vehicles will be completely revoked by the bill starting in 2027.
While this language would support some of House Democrats’ other policy objectives, including strengthening unions, these modifications to the tax credit not only undercut their climate goals, but would, in fact, violate U.S. obligations of “national treatment,” i.e., not to discriminate against goods from other countries, a commitment the U.S. has made in World Trade Organization and other bilateral trade treaties.
The U.S. could impose retaliatory tariffs on U.S. exports by trading partners if it offers a higher tax credit for cars made at U.S. union facilities with U.S.-made batteries.
Some may argue that if certain parts of a measure address environment concerns, this is enough to protect the U.S. against any international treaty obligation. It is not as simple as that. The measure must be very narrowly crafted in order to successfully rely upon the environmental exemptions contained in these agreements.
Labor has no relationship to the environment, and tying the EV tax credit to labor requirements makes the credit appear to be “a means of arbitrary or unjustifiable discrimination” or a “disguised trade restriction on international trade.”
Alternative Policy Ideas
Below, we suggest policy alternatives to the federal tax credit proposed in the BBB Act that would focus solely on expediting the switch to EVs and achieving environmental and emissions reduction goals, thereby not running afoul of U.S. international trade commitments or otherwise risking watering down the impact of the measure:
1. Provision of a tax credit for EV consumers, which is singularly focused to encourage EV purchases
The federal government offers a $7500 tax credit to consumers who purchase an electric vehicle. However, this tax credit is subject to a threshold that automakers must meet before it is available for EVs manufactured by automakers that have sold more than 200,000 EVs.
It is possible to create an expanded tax credit by removing or lifting the cap on the tax credit for EV purchases. This will ensure that it is available for all vehicles and consumers.
Alternately, the federal government could increase the EV tax credit in a similar manner to the BBB Act proposal (which also eliminated a limit), provided such action did not include provisions related to other goals such as tying production in U.S. unionized plants to the credit and excluding the EVs our trading partners.
2. Additional support and promotion for the development of EV infrastructure.
The Infrastructure Investment and Jobs Act, (IIJA), was signed into law in November 2021. It provided $7.5 billion for investments to EV-charging infrastructure. This will allow for the development of a nationwide charging network. However, significant additional funding and policy updates—at both the state and federal level— are required to ensure that the build out of residential charging infrastructure and public charging networks is sufficient to support the shift to EVs, and to convince Americans that they will not be inconvenienced by purchasing an EV as opposed to a gas-powered vehicle.
These proposals, according to our view, would directly reach the objectives related emissions reductions and protect more of the environment through the promotion EVs while not violating international trade law. If the policies are not implemented, our trading partners could view them as discriminatory of their products or as a disguised restriction to global trade.
It is crucial to comply with these trade requirements in order to develop long-term, effective and sustainable policies that promote green initiatives in America.