Inflation Reduction Act Under Pressure To Ease Rules

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The Inflation Reduction Act is a big deal. It will provide billions of dollars of incentives to promote migration to electric vehicles. Most critically, if a car satisfies IRA requirements, a $7500 tax credit is a very attractive incentive to change minds and move the metal. The IRA’s most stringent requirements is battery sourcing and supply chain guidelines to bring manufacturing back to the US. The rules of US content have excluded some carmakers like Hyundai/Kia and they are none too pleased. So there is some wrangling afoot to change the parameters and loosen the Made In America requirements.

According to Bloomberg, discussions with manufacturing executives, battery analysts, and government officials, the U.S. Treasury Department’s interpretation of its regulations could change how billions in new electric-vehicle tax incentives are distributed. This could affect whether a critical part of the battery supply chain is made in North America or remains in Asia. J.B. Straubel, the founder of Redwood Materials and co-founder of Tesla, said that thousands of jobs are at stake.

By the end of the month, the Treasury and IRS are expected to issue guidance for EV incentives over the next decade. One important part involves rules for where battery materials must be sourced to qualify for the $7,500 EV subsidy in the 2022 Inflation Reduction Act. A white paper released by the department on Dec. 29 described its intentions for the guidance. It would treat anode and cathode active materials as processed critical minerals rather than as battery components. This change would expand the countries where materials can be sourced.

U.S. Sen. Joe Manchin is unhappy with this development. He demanded many of the law’s strict domestic-sourcing requirements to win his vote during negotiations last year. He told Bloomberg that his work on the law has been undermined by Treasury in favor of making it easier for foreign automakers to qualify for credits.

U.S. Sen. Joe Manchin said in an email to Bloomberg that these credits were designed to grow domestic manufacturing and reduce reliance on foreign supply chains. Changing the rules would compromise American energy security and deepen dependence on foreign sources.

Treasury spokesperson Ashley Schapitl said in a statement that the guidance being released in March is focused on building a robust industrial base in the U.S. to create jobs and strengthen supply chains. Additional changes to the guidance are possible after it is released in draft form.

Every EV battery has two electrodes, a cathode and an anode, between which charged lithium atoms travel. The cathode is the biggest factor in a battery’s performance, cost, and environmental footprint. It accounts for 60-70% of the cost of a battery cell, while the anode makes up another 9-11 percent.

Cathode and anode materials are currently produced almost entirely in China, South Korea, and Japan. However, this has started to change. Since the climate and tax law was passed in August, companies have announced over $10 billion in new factories to make cathode and anode in the U.S. At least a dozen U.S. startups are developing next-generation materials to make cheaper EVs that drive farther and charge faster.

Requiring cathode and anode to be sourced in North America would benefit startups, while a wider interpretation would be favorable to major automakers with global supply chains. Vivas Kumar, CEO and co-founder of Mitra Chem, a cathode development company based in California, said that the proposed language would still allow the highest-value parts of the battery supply chain to be done outside the U.S. He said that if the white paper guidance proceeds, it would be a travesty.

One of the leading companies building out the U.S. battery supply chain is Redwood, created by J.B. Straubel. In December, Redwood started work on a $3.5 billion factory near Charleston, South Carolina. Less than two months later, it won a $2 billion federal loan to expand production in Nevada. It plans to make enough cathode and other critical materials for 1 million EVs a year by 2025 and enough for 5 million annually by 2030.

Straubel called the proposed reclassification by Treasury “really out of left field” and said it would change the entire intent of the law. He said he’s already hearing from automakers and other materials makers who are reassessing investment plans based on the white paper.

The Inflation Reduction Act incentivizes domestic production of battery technologies in various ways, including a 10% manufacturing credit that applies to anode and cathode production and isn’t affected by the Treasury’s guidance.

David Schwietert, chief policy officer of the Alliance for Automotive Innovation, said that the $7500 consumer tax credit is only one of several incentives that will bolster EV supply chains outside of China. These will accelerate U.S. investment and joint partnerships for critical mineral extraction, processing, and battery cell production here in Norht America.

Of course, the biggest carrot is the $7,500 credit that consumers will receive when buying a qualifying electric vehicle. This subsidy has two parts, each accounting for $3,750 off the price of a new car. The first $3,750 is related to what the law calls “critical minerals,” such as lithium, cobalt and nickel. To qualify, a certain percentage of materials must be mined and refined in countries with which the U.S. has established free trade agreements.

The second $3,750 hinges on the various manufactured components that go into a battery pack. A gradually rising percentage of the value of all components must be made in North America. For the most part, everything that is mined and refined falls into Part 1 and everything that is combined using a chemical or industrial process falls into Part 2.

Shifting cathode and anode materials into the calculation of the critical mineral would make the provenance of individual battery components almost irrelevant, according to data from BloombergNEF. As long as battery cells and modules are produced in North America, that would comprise essentially all of the battery’s “component” value. This is because battery cell manufacturers already include the final steps of turning cathode and anode materials into qualifying electrodes as part of the cell-making process.

Korean battery industry analysts at Macquarie Research reached a similar conclusion after reading the white paper. They wrote in a report to clients that the guidance meant fewer incentives for cathode material suppliers to expand to the U.S. While China will mostly be cut out of the U.S. supply chain, they concluded that it leaves Korea’s supply chain advantage intact.

ElectrifiedMag’s Take:  One thing is becoming very clear in the dawn of the electrification of transportation. If we thought petrol geopolitics was tricky, it ain’t nothing compared to what awaits us when global automakers compete to buy the critical rare earth materials to make millions of EV batteries. In other words, if the US doesn’t play its cards right, we are going to trade Middle Eastern despots for another (maybe even worse) set of despots.

The inflation Reduction Act was passed only after stringent guidelines were added to bring battery chemistry and manufacturing back to the US and reduce our reliance on foreign supply chains. Several of the world’s big kahuna battery makers and OEMs do not meet the IRA’s domestic content requirements, so they have mobilized lobbying resources to find loopholes, hence this story. The other factor is the US might not be able to source all the materials domestically so easing some rules might be the answer. It also will ease the barriers of getting back in bed with foreign supply chain manipulators.

About the author

Dave Cruikshank

Dave Cruikshank is a lifelong car enthusiast and an editor at Power Automedia. He digs all flavors of automobiles, from classic cars to modern EVs. Dave loves music, design, tech, current events, and fitness.
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