The Senate’s proposal aims to accelerate electric car sales and promote domestic battery manufacturing at China’s expense.
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The $369 billion climate and tax package Democrats in the Senate proposed this week could have far-reaching effects on the kinds of cars that Americans drive, where those cars are made and how the country produces its energy. The legislation also aims to break China’s hold on battery supply chains.
The bill, which came back from the dead after Senator Joe Manchin III of West Virginia unexpectedly dropped his opposition, could greatly accelerate changes already underway in the automotive and energy industries.
The proposal aims to simultaneously fight climate change and energize domestic manufacturing. For the most part, it would do so through tax breaks and other incentives — a carrot, rather than stick, approach that is likely to go down easier in corporate boardrooms and with voters.
Democrats are proposing to expand cash incentives for buyers of electric vehicles, along with billions of dollars for automakers, battery manufacturers and suppliers to build or retool factories in the United States. There is money to help consumers pay for rooftop solar panels, for electric vehicle chargers and for fuel-efficient heat pumps.
Filled with compromises, the proposal offers something to all sides of the energy industry. There is a 10-year extension of tax credits for wind, solar and other renewable energy and tax credits for carbon capture technology that companies like Exxon Mobil have invested in.
The bill would introduce a new fee on methane emissions from oil and gas infrastructure while giving fossil fuel companies access to more leases on federal lands and waters.
But there is more at stake than that, policy analysts said. The legislation also contains a strong dose of industrial policy. It favors companies that get their components and raw materials from the United States or its allies, while effectively excluding China.
“I think it is absolutely a transformative bill,” said Leah Stokes, an associate professor of political science at the University of California, Santa Barbara, who specializes in energy and climate change. “It will put us on track for meeting President Biden’s goals. It will reduce every American’s energy bills.”
Finding ways to protect the American economy from China has become a top priority for Congress. On Thursday, the House followed the Senate in approving a $280 billion bill that includes subsidies to spur U.S. semiconductor manufacturing. That bipartisan measure was driven by worries about reliance on Taiwan for most advanced computer chips, as China continues to assert ownership of the island and tries to build its own chip sector.
For the auto industry, one of the most important provisions in the climate bill would eliminate a cap on how many cars from each manufacturer are eligible for a $7,500 tax credit that taxpayers get for buying electric vehicles. Currently, the credits are phased out after a manufacturer has sold 200,000 electric or plug-in hybrid vehicles.
A new proposal. The $369 billion climate and tax package that Senate Democrats proposed in July could have far-reaching effects on the environment and the economy. Here are some of the key provisions:
Auto industry. Currently, taxpayers can get up to $7,500 in tax credits for purchasing an electric vehicle, but there is a cap on how many cars from each manufacturer are eligible. The new bill would eliminate this cap and extend the tax credit until 2032; used cars would also qualify for a credit of up to $4,000.
Energy industry. The bill would provide billions of dollars in rebates for Americans who buy energy efficient and electric appliances and tax credits for companies that build new sources of emissions-free electricity, such as wind turbines and solar panels. It would also set aside $60 billion to encourage clean energy manufacturing in the United States. It would also require businesses to pay a financial penalty per metric ton for methane emissions that exceed federal limits starting in 2024.
Low-income communities. The bill would invest over $60 billion to support low-income communities and communities of color that are disproportionately burdened by effects of climate change. This includes grants for zero-emissions technology and vehicles, as well as money to mitigate the negative effects of highways, bus depots and other transportation facilities.
Carried interest loophole. The deal would narrow this special tax preference, which allows wealthy hedge fund managers and private equity executives to pay lower tax rates than entry-level employees. The bill would introduce new requirements to qualify for the exemption, with the goal of reducing taxpayers’ ability to game the system and pay a lower tax rate.
Fossil fuels industry. The bill would require the federal government to auction off more public lands and waters for oil drilling and expand tax credits for coal and gas-burning plants that rely on carbon capture technology. These provisions are among those that were added to gain the support of Senator Joe Manchin III, Democrat of West Virginia.
West Virginia. The bill would also bring big benefits to Mr. Manchin’s state, the nation’s second-largest producer of coal, making permanent a federal trust fund to support miners with black lung disease and offering new incentives for companies to build wind and solar farms in areas where coal mines or coal plants have recently closed.
Restoring the credits would be huge for Tesla and General Motors, which have used up their quotas, as well as companies like Ford Motor and Toyota that will soon lose access to the credits. The new tax credit, available through 2032, would make vehicles from those companies more affordable and address criticism that only rich people can afford electric cars.
“A big swath of middle-class Americans will be able to get this credit that otherwise would have been blocked out because of the credit limit,” said Joe Britton, executive director of the Zero Emission Transportation Association, whose members include Tesla as well as makers of charging equipment, suppliers of battery materials and other companies tied to the electric vehicle business. “That’s a big deal.”
For the first time, used cars that are battery powered would qualify for a tax break of up to $4,000. That is important because most people buy secondhand, not new, cars. The average price of a new electric car has risen above $60,000, out of reach for many buyers despite the fuel and maintenance savings that those vehicles provide.
Individuals making more than $150,000 a year or couples earning $300,000 or more would not qualify for incentives for new electric cars. The income limits for the used-car incentive are $75,000 for individuals and $150,000 for couples. The credits would not apply to sedans that sell for more than $55,000 and vans, pickups and sport utility vehicles listed at more than $80,000.
“They are trying to drive adoption among middle-class and lower-class buyers, and that’s a good thing,” said Akshay Singh, a partner at the accounting and consulting firm PwC who specializes in the auto industry. “That’s where the bulk of the market is.”
The bill, more than 700 pages, never mentions China. But several provisions appear designed to undermine that country’s hold over the electric vehicle supply chain while making it harder for up-and-coming Chinese carmakers to export cars to the United States.
As it exists, the 200,000-vehicle cap on tax credits would provide a competitive advantage to market newcomers like BYD of China that are expected to use electric vehicles to enter the U.S. market. They could have benefited from the credit while Tesla, the Texas-based company, could not.
The Democratic climate legislation would flip that. As written, the bill appears to disqualify cars not made in North America from the credit. Cars made in North America by foreign companies like Mercedes-Benz, Toyota or Volvo would qualify, but imported models would not.
Cars would qualify for the full credit only if their batteries were made with materials and components from the United States and countries with which it has trade agreements. The percentage of components that have to meet those restrictions to qualify for the credit would increase over time, under the bill. That provision is aimed at encouraging domestic development of businesses like lithium mining and refining.
John DeMaio, the chief executive of Graphex Technologies, which processes graphite for batteries, said the federal funds that were part of the legislation would allow the company to increase the scale of operations at a factory planned for Warren, Mich., north of Detroit. Graphex currently processes graphite near a large mine in China, but Mr. DeMaio said the company was concerned about geopolitical tensions and wanted to move production closer to U.S. automakers.
“This would be a great benefit to a company like ours,” Mr. DeMaio said of the legislation.
For the energy industry, the bill seeks to speed up efforts by most utilities to switch to cleaner sources of power and develop new technologies within the United States while easing the burden of high prices on consumers struggling with inflation.
A recent analysis by Rewiring America, a nonprofit organization that is pushing for electrification of homes and buildings, found that 41 percent of overall inflation was related to a jump in fossil fuel prices. The organization estimates that 103 million families would save money every month, a total of $37 billion a year, just by switching to electric furnaces and water heaters, which would qualify for new tax breaks under the Democrats’ climate bill.
Tax credits are viewed as one of the least expensive ways to reduce carbon emissions. The benefits are worth four times their cost, according to calculations by the Energy Policy Institute at the University of Chicago.
“If we can get this, that’s going to put the United States in a very strong position in meeting the international commitments on climate and industry,” said Dan Reicher, a senior researcher at the Stanford Woods Institute for the Environment.
The measure also includes $60 billion for programs to help disadvantaged communities that often bear the brunt of climate change. Power plants are often in poorer communities, while people who live there lack the means to acquire cleaner technologies.
Any bill this expansive is bound to have opposition. The oil and gas business is not happy with a provision that aims to reduce the methane leaking from wells, pipelines and other equipment. Methane, the main component of natural gas, warms the planet much more than carbon dioxide, though it dissipates faster.
Climate experts have long called for policymakers to do more to rein in methane leaks, but the industry has opposed new regulations and laws, arguing that it is in companies’ financial interest to limit leaks. The bill would require businesses to pay a penalty of $900 per metric ton of methane emissions that exceed federal limits in 2024, increasing to $1,500 per metric ton in 2026.
“While there are some improved provisions in the spending package released last night, we oppose policies that increase taxes and discourage investment in America’s oil and natural gas,” the American Petroleum Institute, which represents oil and gas companies, said in a statement.
But the chief executive of Exxon Mobil, Darren Woods, said he was pleased that lawmakers had defined clean energy to include carbon capture and hydrogen. “We’re pleased with the broader recognition that a more comprehensive set of solutions are going to be needed to address the challenges of an energy transition,” Mr. Woods said during a conference call on Friday to discuss the company’s second-quarter results.
Some environmentalists, however, said they opposed subsidies for carbon capture, which they argue are wasteful and would prolong the use of fossil fuels. They also oppose a measure in the bill that would allow wind and solar projects on public land only if oil and gas drilling leases had been issued first.
Mr. Reicher, who was an assistant energy secretary in the Clinton administration, said such compromises were needed to advance the bill in an evenly divided Senate; no Republicans are expected to vote for the proposal.
“Yes, there is support for fossil fuels, and decarbonizing these technologies,” Mr. Reicher said. “The jury is out on whether or not those technologies will work. From a political perspective, this is what it takes these days to get a big package like this across the finish line.”
Don Clark, Elena Shao and Isabella Simonetti contributed reporting.