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Battery components will need to be 100% made or assembled in the United States or by its allies before the end of the decade in order for electric vehicle (EV) credits to kick in.
At the same time, the lithium, cobalt, nickel, manganese and graphite used in the production of batteries must in a slightly shorter timeframe be 80% extracted and processed in the United States; or in any country with which the United States has a free trade agreement in effect; or recycled in North America.
Those are two key dictates of the new Inflation Reduction Act, which has passed a vote in the US Senate and is scheduled to be voted on by the House of Representatives on Friday August 12.
It is a great way to encourage domestic mining and manufacturing and create more integrated supply chains for EVs, which have typically relied on overseas countries for critical minerals and battery components.
It is also likely to put the US on a path to a 40% reduction in its carbon emissions by 2030 from 2005 levels, closer to its goal of a 50% cut in that timeframe, according to the bill’s climate model.
The problem is, few, if any, EVs appear to qualify for a credit based on these criteria, and a lot will have to change for original equipment manufacturers (OEMs) to meet the standards in the future.
Here’s how the credits will work.
Under the Act, $3,750 of the total available $7,500 tax credit is available to EVs meeting specific critical minerals criteria.
Through 2023, at least 40% of critical minerals for EVs are to be sourced and processed in the US and permitted jurisdictions in order to earn a credit. This percentage rises to 50% in 2024, 60% in 2025, 70% in 2026, and 80% from 2027 onward.
Critical minerals are those on the US critical minerals list, which was updated in February to include nickel and zinc.
The remaining $3,750 of the tax credit is achieved if percentage thresholds for the EV battery components are met.
Those thresholds require that 50% of the battery’s components were manufactured or assembled in North America through 2023, rising to 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028 and 100% from 2029 onward.
Given that credits have traditionally been a key factor spurring consumers’ purchasing patterns when it comes to EVs, automakers will have a vested interest in ensuring they meet the criteria of the new Act.
But it is not clear yet whether EV manufacturers qualify for the credits. It is also possible that some companies will qualify one year but fail to meet the percentage thresholds the next year.
The other catch is that the tax credits apply to cars under $55,000 and pick-up trucks under $80,000, which is not easy to achieve given the current cost of EVs.
What is clear, however, is that the US supply chain is in its infancy and has yet to wean itself off reliance on foreign sources of minerals or components that do not have free trade status.
The United States has free trade agreements with Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore and South Korea, as well as the United States-Mexico-Canada (USMCA).
Here is where the potential problems start.
Only a handful of the US’ free trade partners have battery manufacturing capabilities or produce critical minerals on the list.
Current production of critical minerals occurs mostly outside of the US and its free trade allies. According to the US Geological Survey, China is the dominant supplier of 21 of the recognized critical minerals in the US.
China also has majority control of refining capacity for materials such as cobalt and lithium and produced the lion’s share of the world’s lithium-ion batteries last year, with four of the 10 biggest battery manufacturers based there.
To process its own cobalt, the US is likely to have to buy more from the Democratic Republic of Congo, which is responsible for 71% of global production.
The US’ main cobalt import source currently is Norway, with which it does not have a free trade agreement.
The US is also going to need to stop buying graphite from its dominant supplier, China, and boost imports from other sources, which are relatively insignificant producers by comparison.
It may need to negotiate a place for Indonesia, a key supplier to Ford, on the list of free trade partners, and ensure it steers clear of Russia, from where nickel remains exempt from sanctions related to the invasion of Ukraine.
The US is also going to either diversify away from its current Argentinian lithium supplies and Gabon manganese imports or quickly sign individual free trade deals with both these countries.
This is all to assume that the US’ free trade partners produce enough of the minerals that it will need and, perhaps more importantly, don’t have alternative buyers.
That is also not taking environmental, social and governance (ESG) factors, or resource nationalism and geopolitics, into account.
The US has been pushing to develop its own sources of critical minerals for batteries, invoking the Defense Production Act earlier this year.
But mines do not spring up overnight, and even those in the planning stage take years to pass regulatory hurdles.
It is going to make projects such as those of Talon Metals, Glencore and Electra Battery Materials to create an integrated and localized battery materials park for the EV market all the more important.
On the plus side, the free trade partner list includes South Korea and Japan, which are decent-sized battery manufacturers. Battery manufacturing capacity is meanwhile growing apace in Poland, Hungary, Germany and the United Kingdom, even though the latter countries don’t have free trade deals with the US.
Of course, there are likely to be exemptions to these rules when supply chain adjustments are made. After all, if it had been possible to make these changes already, then, in all likelihood, more of them would have happened.
For automakers, battery processing firms and mining companies, the Act means potentially unraveling some of the huge raw materials deals they have done in recent years.
Even if OEMs can convince their supply chain partners to build processing and manufacturing capacity in a US-friendly jurisdiction, they may still miss out on the portion of the EV credit focused on the source of the critical mineral.
The provenance of materials is going to be increasingly important.
OEMs have realized that turning a blind eye to the origin of some of their materials in a world of heightened focus on ESG has become increasingly untenable.
The Inflation Reduction Act will make it impossible to operate without knowing exactly where material in a supply chain comes from.
This will make tracking and tracing solutions all the more important. Enter Circulor, MineHub, Trade Cloud and other digital and blockchain companies that are keeping abreast of supply chains, ESG standards and other criteria.
Once again, the path to net-zero – however admirable and necessary – will not be smooth.