The Inflation Reduction Act – Not Everyone’s Cup of Tea
The US Inflation Reduction Act is a far reaching piece of legislation intended to accelerate the USA battery and EV industry and supply chain. It offers a $7,500 tax credit for new EVs which is split into two halves. The first half requires the EV to have at least 40% locally sourced minerals i.e., they must originate from the US or a country with which the US has a free-trade agreement (FTA). In addition, there are restrictions on the proportion of materials & components that can come from China. 40% before January 2024, rising to 50% in 2024, 60% in 2025, 70% in 2026 and to 80% in 2027. The restrictions mean that DRC sourced cobalt and Indonesian nickel would also not qualify.
The other half of the tax credit comes from having an increasing proportion of the battery electrodes made or assembled in North America starting at 50% and rising to 80% by 2028 and 100% by 2029.
The legislation is great news for US-based EV OEMs and cell makers. In particular Tesla which has already stated that it expects to meet the terms of the IRA. This would give them a $35/kWh and $10/kWh tax incentive for each battery cell and pack produced respectively – a huge economic boost to its business given that it is planning to build over 1 terawatt hour (Twh) of capacity, and it will raise the profit margin for its planned low cost EV’s
The IRA also provides a 10% production cost tax
rebate for production of critical minerals and electrode materials – great for the battery materials suppliers provided they can get their minerals from an IRA compliant source. Potentially also significant for production of LFP materials in the US – which increasingly can provide vehicles with an acceptable range.
However not everyone is happy. CATL has cited it as a reason not to build a battery plant in the USA and South Korea has gone as far as banning its cathode material producer L&F from building there, citing intellectual property leakage concerns. Meanwhile the Natural Resources Minister of Canada – Jonathan Wilkinson, reportedly told the White House that the IRA prevents a level playing field between the US and Canada. Ultimately Canada may now need to respond by increasing the amount of support to its own domestic battery supply chain even though as it argues it has nurtured an environment attractive for the battery supply chain due to factors such as availability of clean renewable energy, a competent labour force and local mineral supplies.
Regardless of these concerns, the US which has 23 gigafactories in the pipeline, urgently needs its own upstream battery supply chain, and if the IRA manages to alienate companies who might otherwise have located in the USA, it could prove counterproductive.