Sen. Joe Manchin III and the auto industry are pushing for diverging interpretations of tax breaks in Democrats’ climate and health care budget package enacted last year that defray the cost of buying electric and hydrogen-powered vehicles.

Manchin, who demanded strict sourcing rules to boost domestic manufacturing and energy security before he’d back the tax credits last summer, introduced a bill Wednesday meant to force the Biden administration to apply stringent requirements more quickly.

That’s putting him at odds with foreign allies, some automakers and car dealerships that are pleading for more flexibility as the Treasury Department hones its guidance.

Manchin said this week that he’s concerned about how the electric vehicle credits are being rolled out and that the law as a whole is the subject of global chatter because it’s successfully showing the U.S. is where companies should invest in clean energy technologies.

“They have to understand that is an energy security bill,” Manchin, D-W.Va., said Monday. “It was never designed to be just a climate bill, which is the way it’s being promoted.”

The budget reconciliation law included the $7,500 credit for consumers buying clean vehicles. Half the incentive is dependent on whether an electric vehicle’s battery components were made or assembled in North America. Another half is dependent on whether critical minerals used in car batteries were extracted or processed in the U.S. or a country where a free trade agreement is in effect, or recycled in North America. Those rules become more stringent over the coming decade.

For a vehicle to qualify, final assembly must happen in North America, vehicles must meet pricing constraints and buyers must fall below income limits.

The final assembly rule took immediate effect, but Treasury advised the critical mineral and battery component mandates wouldn’t apply until the day after the department publishes proposed guidance, which is expected in March.

Manchin’s new bill would retroactively put into effect battery and critical mineral sourcing mandates starting from Jan. 1 of this year, rather than giving leeway until Treasury produces guidance. According to a Democratic aide on the Senate Energy and Natural Resources Committee, which Manchin chairs, Manchin is concerned Treasury will miss its March timeline to update guidance, which could exacerbate U.S. reliance on foreign supply chains.

Manchin’s proposal might pressure Treasury, though it’s unlikely to become law with little appetite even among Democrats to reopen what they consider a hard-fought win on climate policy. 

“We’re not going in and rewriting the law, period,” Senate Finance Chair Ron Wyden, D-Ore., said.

Triggering trade disputes

The rules meant to boost U.S. manufacturing and force supply chains to run through allies have drawn global blowback. Not all U.S. allies have free trade agreements, so measures meant to blunt China’s dominance in producing minerals like lithium, nickel and cobalt needed for EV batteries are also frustrating European countries.

Manchin said on Bloomberg Television last week that he didn’t realize the European Union doesn’t have a free trade agreement with the U.S. when Democrats passed the EV restrictions. He said Monday that European countries should reconsider their own policies for promoting clean energy, and the U.S. could work on a trade deal.

“Whether I realized it or not, they need to hopefully get that together and let’s get a free trade agreement,” Manchin said.

Wyden backed up the message that sourcing mandates aren’t up for renegotiation, saying that if European countries are concerned about the clean energy incentives they can design their own packages.

Still, allies including the EU and South Korea have argued the EV requirements violate World Trade Organization rules as well as a U.S.-South Korea bilateral trade agreement. An EU official, who spoke on the condition of anonymity, said the union is still negotiating with the Biden administration in hopes of getting EU-made vehicles to qualify, particularly for the broader critical mineral production requirements.

“The critical minerals and final assembly requirements are very clearly constructed in a way that is a problem for us, and that’s what triggered our discussions with the administration,” the EU official said.

Foreign auto manufacturers have been lobbying their countries’ governments to file a WTO complaint against the U.S. law’s sourcing language. South Korea-based Hyundai Motor Co., for example, is building a new factory in Georgia, but the vehicles that come from it may be ineligible for the tax credit due to sourcing requirements.

Some major forces do align with Manchin. Three unions representing autoworkers, steelworkers and machinists teamed up with environmental group Sierra Club and consumer advocacy group Public Citizen on a letter to President Joe Biden opposing threats to leverage WTO or other “out-dated trade rules” against the EV credits or other climate incentives as written.  

Melinda St. Louis, director of Public Citizen’s global trade watch, said in an interview that climate investments like those in electric vehicles should be protected, in particular from trade rules written with influence from large corporations. She said  climate and U.S. manufacturing goals should be a priority, while companies might prioritize cheaper supply chains with fewer environmental regulations.

The trade threats from other countries are “another example of how outdated trade rules have been used and weaponized to undermine domestic policymaking,” St. Louis said. “And in this case, we think this is a really critically important policy that we do not want to be weakened or watered down or potentially opened up for even broader pushback.”

At least one major U.S. automaker — General Motors Co., the Detroit-based manufacturer of Chevrolet, Buick, GMC and Cadillac vehicles — is comfortable with the battery sourcing mandates. GM’s head of global public policy, Omar Vargas, said in a Jan. 12 LinkedIn post that his company is “well-positioned because of the wide range of efforts we have underway to localize as much of the supply chain as possible.”

Leasing leeway

Manchin and proponents of looser electric vehicle incentive rules are also clashing on which credit applies to leased vehicles like those offered by car dealerships as contracted long-term rentals.

The reconciliation law defined leased vehicles as among EVs that qualify for a separate credit for commercial uses, as long as they’re not resold. The commercial tax credit carries none of the sourcing, final assembly, income or pricing limitations that the consumer incentive does, so proponents of looser rules want to see more cars fall under that umbrella.

In a series of frequently asked questions released in late December, Treasury said the treatment depends on factors including how a vehicle is treated for income tax purposes, how much of a vehicle’s useful life the lease covers, and what options lessees are presented with at the end of their contract. If a car is ultimately treated as sold to a consumer, it wouldn’t qualify for the commercial credit unless the buyer would otherwise qualify.

Some foreign countries, automakers and dealerships are applauding the clarity that their EVs qualify for subsidies when leased. The EU official added that many are hoping for the leasing language to apply to dealer-provided leases, rental cars and rideshare vehicles, arguing it helps automakers with sales while they build out U.S. manufacturing.

Still, Manchin is opposing the FAQ guidance as a loophole that goes against the intent of the law. He urged Treasury Secretary Janet L. Yellen in a mid-December letter ahead of the FAQ release to interpret the commercial credit in a way that boosts domestic manufacturing, saying any guidance must not be “lenient to foreign countries trying to find loopholes within our tax code that would enable them to flood our vehicle market.”

His bill would not impact the leasing language in Treasury’s guidance, although an aide said that they intend to look into other legislative fixes to clarify Manchin’s intentions for the tax credit.