There has been a lot of discussion about the new Clean Vehicle Credit in the Inflation Reduction Act of 2022 making its way to Joe Biden’s desk (after leaving the Senate, it now only needs to make it through the House of Representatives). However, for all the simple — and mostly good — changes to the existing US EV tax credit, there’s a giant element of the legislation that’s a little hard to decipher, and even harder to understand its implications.
First rewind. For the past few years, I’ve interviewed EV battery mineral experts about the battery supply chain and car manufacturers’ commitments. Apart from other concerns that I won’t get into here (i.e. not enough firm contracts or investments to launch new mines), I think the main concern is China’s near monopoly on supply, and especially processing of essential minerals used in battery cells (battery-grade lithium, graphite, cobalt, etc.). EV batteries are not produced without ingredients that come from China.
Then you have the issue of nickel, which is a big part of many EV batteries and often comes from Russia. But honestly, the Chinese dominance of other battery elements is so great that it is not even necessary to get into the nickel matter (which is much easier to solve).
Let’s take a look at the details of the IRA text and put it in plain English without all the confusing “choose your own adventure” loops.
No tax credit for EVs using “critical minerals” from “foreign entities of concern”
On the subject of foreign entities of concern, an important part of the legislation can be found on page 390 of the IRA The text says:
”EXCLUDED ENTITIES. For the purposes of 2 of this section, the term “new clean vehicle” does not include:
”(A) any vehicle placed in service after December 31, 2024, in respect of which any of the applicable critical minerals in the battery of such vehicle (as described in subsection (e)(1)(A)) extracted, processed or recycled by a foreign entity of interest (as defined in section 40207(a)(5) of the Infrastructure Investment and Jobs Act (42 USC 18741(a)(5))), or
”(B) any vehicle put into service after December 31, 2023, in respect of which any of the components in the battery of such vehicle (as described in subsection (e)(2)(A)) have been manufactured or assembled by a foreign entity of interest (as defined).’.
In plain English, if an EV battery contains minerals that come from a “foreign entity of concern”, that EV is not eligible for the tax credit. And yes, this includes China.
But come on, can’t you make a battery without these minerals coming from China? No not really. China processes/refines 59% of industrial lithium, 68% of nickel, 73% of cobalt and even 100% of graphite.
— Simon Moores (@sdmoores) May 1, 2022
What Are Identified As “Critical Minerals” In EV Batteries?
Well, let’s not jump to conclusions. What exactly are “critical minerals”?
It turns out essential minerals…are pretty much anything you’d find in a battery: aluminum, antimony, barite, beryllium, cerium, cesium, chromium, cobalt, dysprosium, europium, fluorspar, gadolinium, germanium, graphite, indium, lithium , manganese, neodymium, nickel, niobium, tellurium, tin, tungsten, vanadium, yttrium and 25 other “others”.
I didn’t even know half of it existed.
The good news is that the EV supply chain requirements won’t go into effect until 2024, but that’s also not far off when you consider the issue of mining, battery supply chains, and automotive supply chains.
I reached out my hand to RK Shares Howard Klein to hear his thoughts on this matter as we’ve been talking about the matter for years. We’ll have a podcast on the matter next week, assuming Biden gets the bill on his desk and signs it this week. Stay tuned. In the meantime, below are a few quick shots of Howard, a director of a North American mining company, and myself.
This is short term…
It is not yet clear whether there are all EVs in the US market that do not use minerals processed or refined in China. If automakers and their battery suppliers can’t find the mineral supplies to meet these requirements by 2024, we may have a very limited (or non-existent) list of EVs eligible for the clean vehicle tax credit.
… But is important in the long run
There is no denying that China’s near monopoly on several critical battery minerals is an economic challenge or threat to the continued growth of the electric vehicle market and economic security. We have all seen what can happen when the oil market is disrupted and oil is pumped out of the ground and refined in many countries. A 100% grip on battery-grade synthetic graphite, a 73% grip on cobalt, a 68% grip on nickel, and a 59% grip on lithium are slightly different.
I don’t see a safe, sustainable EV industry that doesn’t break through this Chinese dominance of these crucial minerals.
Howard Klein, co-founder of RK Equity, writes, “On balance, the US EV grants, local content requirements and government funding should be substantially positive for those developing projects in the US and countries with which we have free trade agreements (e.g. . Canada, Australia, Chile, Korea, Mexico). If the reform allowed that senator (“Mining”), Manchin would get guarantees later this year. ”
Todd M. Malan, Chief External Affairs Officer and Head of Climate Strategy at Talon Metals, states: “The Inflation Reduction Act is a huge boost for the entire U.S. electric vehicle supply chain, from mining to battery manufacturing to recycling. The content requirements will ensure that US workers in domestic mining and mineral processing facilities are part of the EV transition, and wisely include our free trade partners such as Canada, Australia and South Korea, who will ensure adequate supplies for US production. It also recognizes the bipartisan consensus that the mineral EV battery supply chain is a matter of national security.”
Indeed. These provisions are important for the birth, revival and/or growth of critical industries and jobs in the United States. January 1, 2024 may be a tough target date to get all battery minerals out of domestic or free-trade countries, but igniting the industry’s fringe is just what it takes to secure a better and safer future for Americans, and the planet as a whole.
Featured image courtesy of Talon Metals.
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