What does the Inflation Reduction Act mean for climate tech?

Posted Aug 14, 2022, 6:10 am

James Morton Turner

Wellesley College/The Conversation

The U.S. Senate passed a far-reaching climate, energy and health care bill
on Aug. 7, 2022, that invests an unprecedented US$370 billion in energy
and climate programs over the next 10 years – including incentives to
expand renewable energy and electric vehicles.

Rapid and widespread adoption of electric vehicles will be essential for the United States to meet its climate goals. And the new bill, which includes a host of other health and tax-related provisions,
aims to encourage people to trade their gasoline-fueled cars for
electrics by offering a tax credit of up to $7,500 for new electric
vehicles and up to $4,000 for used electric vehicles through 2032.

But there’s a catch, and it could end up making it difficult for most EVs to qualify for the new incentive.

The bill, which needs House approval,
requires that new electric vehicles meet stringent sourcing
requirements for critical materials, the components of the battery, and
final assembly to qualify for the tax credits. While some automakers,
like Tesla and GM, have well-developed domestic supply chains, no
electric vehicle manufacturer currently meets all the bill’s
requirements.

Building a domestic EV supply chain

At first glance, the revised EV tax credits seem like a smart move.

Existing U.S. policy allows credits for the first 200,000 electric vehicles a manufacturer sells. Those credits helped jump-start demand for EVs.
But industry leaders, including Tesla and GM, have already hit that
cap, while most foreign automakers’ vehicles are still eligible. The
bill would eliminate the cap for individual automakers and extend the
tax credits through 2032 – for any vehicle that meets the sourcing
requirements.

Right now, China dominates
the global supply chain for materials and lithium-ion batteries used in
electric vehicles. This is no accident. Since the early 2000s, Chinese
policymakers have adopted aggressive policies
that have supported advanced battery technologies, including
investments in mines, materials processing and manufacturing. I discuss
how China got a head start in the race toward a clean energy future in
my new book, Charged: A History of Batteries and Lessons for a Clean Energy Future.

Sen. Joe Manchin, the West Virginia Democrat who stalled earlier
efforts to get these measures through the sharply divided Senate, said he hopes the requirements will help scale up the U.S. domestic critical minerals supply chain.

The EV incentives would complement other U.S. policies aimed at
jump-starting domestic EV manufacturing capacity. Those include $7
billion in grants to accelerate the development of the battery supply
chain allocated in the Infrastructure Investment and Jobs Act of 2021 and a $3 billion expansion of the Advanced Vehicle Manufacturing Loan Program included in the current bill, formally known as the Inflation Reduction Act.

The problem is that the Inflation Reduction Act’s
sourcing requirements come online so quickly, starting in 2023, and
ratchet upward so rapidly, that the plan could backfire. Instead of
expanding electric vehicle adoption, the policy could make almost all
electric vehicles ineligible for the tax incentives.

Even Tesla’s Gigafactory relies on China

The bill excludes incentives for any new vehicle which contains
battery materials or components extracted, processed, manufactured or
assembled by a “foreign entity of concern” – a category which includes
China.

According to Benchmark Intelligence,
a market research firm that tracks the battery industry, China
currently controls 81% of global cathode manufacturing capacity, 91% of
global anode capacity, and 79% of global lithium-ion battery
manufacturing capacity. By comparison, the United States has 0.16% of
cathode manufacturing capacity, 0.27% of anode manufacturing capacity,
and 5.5% of lithium-ion battery manufacturing capacity.

Even the U.S.’s most advanced battery factories, such as Tesla’s Nevada Gigafactory, currently rely on materials processed in China. Despite Ford’s plans to expand its domestic supply chain, its most recent deals are for sourcing batteries from Chinese manufacturer CATL.

In addition to excluding materials and components sourced from China
starting in 2023, the bill also requires that a minimum percentage of
the materials and components in batteries be sourced domestically or
from countries the U.S. has a fair trade agreement with, such as
Australia and Chile. The threshold starts at 40% of the value of
critical minerals in 2023 and ramps up to 80% in 2027, with similar
requirements for battery components.

If a manufacturer doesn’t meet these requirements, its vehicle would
be ineligible for the tax credit. Whether the Treasury Department would
come up with exemptions remains to be seen.

Although EV manufacturers are already pursuing plans to develop
supply chains that meet these sourcing requirements, proposals for mines
and processing facilities often face challenges. Indigenous and
environmental concerns have slowed a proposed lithium mine in Nevada. In some cases, key materials, such as cobalt and graphite, are not readily sourced domestically or from fair-trade allies.

Proposed recycling projects could help meet demand. Redwood Materials
projects its recycling facility, currently under construction in
Nevada, will supply cathode and anode materials to support one million
electric vehicles per year by 2025. Despite such optimistic
projections, experts anticipate
that recycling can only play a small role in offsetting the demand for
raw materials needed to scale up electric vehicle adoption in the coming
decade.

How much can the bill do to cut emissions?

Clean energy supporters called the bill historic.
In addition to a massive investment in renewable energy and electric
vehicles, it provides support for technologies such as carbon capture
and storage and zero-carbon fuels, and includes a fee to curtail methane emissions, as well as some trade-offs that boost fossil fuels.

Forecasters have projected that the climate package as a whole could
help put the U.S. on track to reduce greenhouse gas emissions by about 40% by 2030 compared to 2005 levels – still short of the Biden administration’s goal of a 50% reduction, but closer.

But for the U.S. to hit those goals, electric vehicles will have to
replace fossil-fueled vehicles by the millions. A realistic EV tax
credit that allows time for manufacturers to diversify their supply
chains and makes these vehicles more affordable for all Americans will
be crucial. The proposed policy risks short-circuiting EV tax credits
just when they are needed most.

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