The Inflation Reduction Act (IRA), signed into law by President Joe Biden on Aug. 15, contains more than $369 billion in provisions that aim to fight climate change over the next decade. A major piece of that climate package is the extension of federal tax rebates of up to $7,500 on the purchase of a wide range of electric vehicles, including used ones, as long as they are manufactured in North America.
A key difference from previous EV incentives is that, in order to qualify for tax credits, future electric vehicles need to be not only assembled in North America, but also made of batteries produced domestically or within a country with which the U.S. has a free trade agreement, such as Canada and Mexico. This new rule is intended to encourage electric carmakers to move their supply chain from developing countries to the U.S., but industry insiders doubt that shift will happen within the next few years like the administration hopes—or at all.
New EV incentives include strict battery material conditions
The IRA places restrictions on two aspects of EV batteries: their components, such as battery cells and electrode active material, and the minerals that go into the production of these components.
Starting next year, eligible EVs need to have at least half of their battery components produced in North America and 40 percent of battery raw materials coming from the U.S. or a trade partner. The minimum percentages required will increase each year through 2028 until reaching 80 percent for battery raw materials and 100 percent for components.
Some automakers, including Tesla and General Motors, have already started developing their own batteries at facilities in the U.S. and Canada. Tesla, for example, is manufacturing a novel type of battery cell at a factory in Nevada that’s supposed to deliver longer driving ranges than the batteries it currently imports from Japan. Such vertical integration may help an EV maker pass the battery component tests under the IRA. But the real challenge is where it sources battery raw materials.
An EV battery is typically made of nickel, cobalt and manganese (the three main elements of the cathode), graphite (for the anode), lithium and copper. The mining and refinement of these minerals, known as the “big six” in the battery industry, is controlled predominantly by China, which is labeled by the Biden administration as “a foreign entity of concern.” Under the IRA, any EVs made after 2025 that contain materials coming from China, however small a fraction, will be excluded from federal tax credits. The bill lists more than 30 battery minerals subject to the manufacturing percentage requirements.
It’s almost impossible for EV makers to cut ties with China in the near future
Chinese state-owned firms owns about 80 percent of global cobalt refining operations and more than 90 percent of refineries that produce nickel, manganese and graphite. “If you buy your batteries from companies in Japan and Korea, which many automakers do, there’s a good chance your batteries contain material that’s refined in China,” said Trent Mell, CEO of Electra Battery Materials, a Canadian company that supplies processed cobalt to EV makers.
“Automakers may want to make more EVs that qualify for the tax credits. But where would they go to find qualified battery suppliers? There is no alternatives for automakers right now,” said Lewis Black, CEO of Almonty Industries, one of the few suppliers of tungsten, another mineral used in the anodes and cathodes of some EV batteries, outside of China. (China controls more than 80 percent of the global tungsten supply). Almonty has mining and refining operations in Spain, Portugal and Korea.
China’s dominance in the battery raw material sector is a result of decades of aggressive government policies and investments—something Black doubts can be easily replicated in western countries.
“China has, over the past 30 years, developed an extraordinarily efficient supply chain of battery raw materials,” Black said. “In western economy, it can take eight or more years to open a new mining or refinery site.”
“And there’s no guarantee the next administration will continue this policy,” he added.
Mell, of Electra Battery Materials, says his company, previously called Cobalt First, is the only refiner of EV battery-grade cobalt in North America. It sources raw cobalt from a mine in Idaho and is building a refinery facility in Canada’s Ontario, expected to begin operation in early 2023. Electra is building a second facility in Canada’s Quebec designed to refine nickel.
“North America is lacking the refining capability for battery-grade materials. But I believe this bill will spur a new investment cycle in the battery supply chain,” Mell said.