energy insights

Inflation Reduction Act Could Spur U.S. Lithium Production

President Joe Biden’s Inflation Reduction Act (IRA) announced to the world in August that America will not concede to any nation’s dominance of the electrification of the automotive industry.

After sleeping for more than a decade, America has awoken, and the economic battle with China and others is now on with a strong and clear national mandate to develop an American electric vehicle industry from the ground up. The bill contains tax credits and incentives that will nurture U.S. supply chain growth extending from the show-room floor to domestic battery manufacturers and U.S. lithium producers.

The law restricts federal tax credit dollars for U.S. electric vehicle buyers, encouraging consumers to buy American. The measure is designed to reduce demand for Chinese battery imports and grow the market for batteries made in the U.S. or by a close American ally.

“The IRA … will go a long way toward accelerating the build-out of a more regionalized EV supply chain,” said Chris Berry, energy metals strategist and president of U.S. consultancy House Mountain Partners.

The new law makes a number of significant changes with respect to federal subsidies for EVs, according to Forbes.

Beginning in 2024, the $7,500 tax credit for EV buyers will only apply to vehicles assembled in North America. Also, a portion of the critical minerals used in batteries, including lithium, will have to come from North America or a U.S. trading partner. The U.S. has 20 free-trade partners, and the list includes only two prominent lithium-producing nations, Australia and Chile. No subsidies will be available for vehicles with minerals or components sourced in China or Russia.

The critical mineral requirements found in the IRA will be phased in gradually, according to Forbes. Starting in 2024, 40% of critical minerals found in EV batteries will have to be extracted, recycled, or processed in the United States or by a U.S. free trade partner. That percentage rises to 80% by the end of 2026. Also, starting in 2024, 50% of battery components will have to be made in North America, with the number increasing to 100% by the end of 2028.

Meanwhile, the law allows lithium producers to seek production tax credits that are equal to 10% of their operating costs.

While industry watchers are encouraged by the potential momentum the Inflation Reduction Act could create for American battery producers, the fact remains that the U.S. is far behind China and others in developing the supply chain it needs to serve the nation’s growing EV market.

Establishing a new U.S.-based supply chain would take the better part of a decade, according to Simon Moores, Benchmark Mineral Intelligence chief executive of lithium market analysis. It would be almost impossible for any of America’s free trade partners to fully replace China’s role in raw material imports before 2024.

While there is still much uncertainty, the Inflation Reduction Act has set the stage for greater consumer demand for U.S. lithium and American-made EV batteries, but price pressure and environmental resistance are among potential challenges.

Questions surrounding the future of the U.S. electric vehicle industry may or may not be resolved anytime soon, but one thing is certain. President Biden’s new law puts the world on notice.

America is in the EV race.