Inflation Reduction Act in focus in Trump presidency | Hotter Commodities

He has not specified which programs he plans to target, but it is safe to say that now Trump has been elected as 47th President of the United States, the centerpiece of incumbent Joe Biden’s economic achievements is set to undergo some change.

The IRA aims to cut emissions by 40% by 2030, but its ultimate goal is to drive economic growth, create jobs and set a global standard for decarbonization and sustainable practices. It has been described as a landmark in legislative history, directing over $369 billion toward sustainable job creation across the supply chain.

Pundits say a future Trump administration will target changes to tax credits and incentives created by the IRA. That includes tax credits for electric vehicles (EV), tightening qualifications for the advanced manufacturing tax credit with regards to foreign entities of concern (FEOC) like China, and slashing the grant program, industry experts say.

“To further defeat inflation, my plan will terminate the Green New Deal, which I call the Green New Scam,” Trump said in a speech to the Economic Club of New York in September. “[We will] rescind all unspent funds under the misnamed IRA,” he added.

That would be a massive setback to many of the lithium, nickel, cobalt and other critical minerals projects, as well as new technologies and processing facilities, whose future is dependent on grants and loans. According to analysts at Jefferies, around $60 billion out of a total $80 billion of funds for the energy transition across the IRA and Bipartisan Infrastructure Law (BIL) are yet to be awarded or obligated for 2024.

Electric vehicles

Trump has made it clear that the push towards EVs, which have formed a key pillar of the Biden administration’s approach to the energy transition, will now be slowed. During the recent presidential campaign, candidate Trump said that he would “end the EV mandate on day one.”

Initiatives such as the Department of Energy’s grant program, tax credits and other incentives for customers and manufacturers of batteries and EVs are now at risk of being rolled back or eliminated, industry experts say.

It is not clear what might replace current credits, if anything. The clean vehicle tax credit currently requires final assembly in North America, and eligibility depends on increasing percentages of US battery components and minerals being used.

Industry observers say all of these changes would likely have widespread implications through the battery raw materials supply chain for those companies that rely on the financing, including producers of lithium used in batteries and copper and aluminium used in renewables, manufacturers of batteries and components, and automotive firms.

Changes to credits would also affect consumers. The IRA had created a mechanism to transfer the 30D clean vehicle credit of up to $7,500 and 25E previously owned clean vehicle credit of up to $4,000 to registered dealers. This mechanism gives consumers an upfront discount and extends the reach of the credits by making the credit available at the point of sale rather than when buyers file their taxes.

According to the US Department of the Treasury, more than 90% of new clean vehicle transactions and around 80% of used clean vehicle transactions reported through Internal Revenue Service Energy Credits Online currently involve a transfer of the credit to the dealer.

Trump has also said he plans to roll back or eliminate standards for EVs under the Environment Protect Agency (EPA). Having already stated a desire to get rid of California’s zero emissions standards, Trump is also expected to do away with the requirement that EVs account for 56% of new vehicle sales by automotive original equipment manufacturers (OEMs) by 2032, and plug-in hybrids or other electric cars account for at least 13% in the same period.

The move would in theory ease pressure on Detroit’s Big Three – Ford, General Motors, and Stellantis – to switch their production lines to EV, which some argue is a boost for the US auto sector as it struggles with slowing sales of clean energy vehicles. Others argue that in the longer term, a move away from EVs could lead the US to fall further behind the rest of the world as foreign competitors continue to innovate and produce EVs.

It would also inevitably have an impact on the 30 gigafactories in development in the US as it actively pursues sustainable mobility and technological innovation.

There is also the question of tariffs, another key policy area for Trump. There is already a 100% tariff on Chinese-made vehicles imported into the United States.

Now other foreign-made cars are likely to face higher tariffs, a move that has not been lost on investors as stocks in Mercedes-Benz, Porsche and BMW fell sharply as the election result was announced.

It remains to be seen what this will mean for Tesla, whose chief executive officer Elon Musk has actively campaigned for Trump and which has around 40% of its manufacturing capacity in China. Shares in Tesla soared on Wednesday November 6 following the news of Trump’s win.

Foreign Entity of Concern

A key area that could come into the spotlight are sourcing requirements related to FEOC. When it comes to the 30D credit, FEOC rules permit licensing deals and joint ventures with under 25% ownership.

The expectation is that these rules become stricter, a move that will have important short-term implications for nickel, a market that is struggling to find non-FEOC sources for battery raw materials supply chains.

Similarly, the 45X Advanced Manufacturing Production Credit, which is currently available to any entity in the US, is expected to be prohibited for FEOC.

There is bipartisan support for this, with a group of Senators having already proposed the American Tax Dollars for American Solar Manufacturing Act, which aims to stop Chinese solar panel manufacturers from claiming subsidies for operations in the US. The Act would not just apply to the solar industry but across all technologies eligible for the 45X credit.

Politics

But all of these potential changes are not without potential complications. While there are nuances in the approach of Democrats and Republicans, there has been solid bipartisan agreement on the importance of strategic competition and supply chain security for the US.

Not all Republicans support the elimination of tax credits and subsidies; after all, many IRA projects are concentrated in traditionally Republican states and create permanent jobs.

This was highlighted in a letter sent in August to House Speaker Mike Johnson, signed by 18 House Republicans, expressing objections to repealing IRA credits on the grounds that it would halt project development and undermine investments.

“Energy tax credits have spurred innovation, incentivized investment, and created good jobs in many parts of the country – including many districts represented by members of our conference,” the letter said.

“We must reverse the policies which harm American families while protecting and refining those that are making our country more energy independent and Americans more energy secure. As Republicans, we support an all-of-the-above approach to energy development and tax credits that incentivize domestic production, innovation, and delivery from all sources,” it added.

Outright repeal of the IRA would require the support of both houses of Congress; as it currently stands, the Republicans have won the Senate and the result for the House of Representatives is unclear as votes are still being counted.

Changes to tax credits meanwhile require a change in tax law; a weakening of IRA provisions as part of Budget negotiations would require a simple majority in Congress.

But Trump could move to defund or limit EV subsidies through executive orders or other policy actions, industry experts note.

Given the focus Trump’s administration will have on extending tax cuts that are set to expire at the end of 2025, there is a clear incentive to find the money to pay for this from elsewhere, adding impetus to the potential IRA changes.

In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.