Concessions and lack of clarity slow investments linked to Inflation Reduction Act | Hotter Commodities
Despite considerable progress in the year since the passage of the US Inflation Reduction Act (IRA), investment related to the legislation has slowed and its ultimate effectiveness remains to be seen, the vice president and director of the Securing America’s Future Energy (SAFE) Center for Critical Minerals Strategy said
In a recent interview, Abigail Wulf, the vice president and director of the Securing America’s Future Energy (SAFE) Center for Critical Minerals Strategy, told Fastmarkets that progress in the immediate aftermath of the Inflation Reduction Act (IRA) was incredibly positive, including a rapid shift to reconfigure supply chains to qualify for the Clean Vehicle Tax Credit, which applies to the purchase of new, qualified plug-in electric vehicles (EVs) or fuel cell EVs.
“However, there has also been some backtracking in order to appease our allies and balance the need for deployment, and there is lingering uncertainty over the interpretation of the definition of a Foreign Entity of Concern (FEOC),” she said.
“As a result, the United States has not seen as much investment as it did in the early days of the law, and in addition, there is likely some very effective lobbying going on behind the scenes, leading the administration to soften some of the provisions,” she noted.
“I’m slightly nervous progress will slow. It is yet to be seen how effective the IRA will be,” Wulf added.
The IRA was passed by the US Senate on August 16, 2022. It includes roughly $369 billion in green energy tax incentives, including a new, advanced manufacturing production tax credit for taxpayers who produce critical minerals, as well as tax credits promoting the sale of EVs.
SAFE, a Washington-based non-profit organization, works to advance transformative transportation technology to enhance energy security. As part of this, it created the Ambassador Alfred Hoffman Jr Center for Critical Minerals Strategy, whose work includes advocating for responsible supply chains for critical minerals and materials necessary for the transportation, energy and technology innovations of the future.
FEOCs and Indonesia
One key area in the IRA where greater clarity is widely being called for relates to FEOCs, Wulf noted.
The IRA states that, starting from next year, for vehicles to qualify for EV tax credits, they “cannot have battery components manufactured or assembled by an FEOC.” Additionally, from 2025, “qualifying vehicles’ batteries cannot contain critical minerals extracted, processed or recycled by a FEOC.”
An FEOC includes any foreign entity that is “owned by, controlled by or subject to the jurisdiction or direction of a government of a covered nation.’ Those that currently fall into this category are China, Russia, North Korea and Iran.
The phrase has been subject to speculation as to what level or nature of ownership would constitute ownership or control by a foreign government and what it would mean to be subject to the jurisdiction or direction of a foreign government.
This is particularly important to automakers in the context of China, given that country’s control of the supply chain for critical minerals such as graphite and rare earths as well as the majority of the world’s lithium processing capacity.
“We’re still waiting for the draft guidance for the FEOC. SAFE’s recommendation is to adopt a case-by-case approach to projects. This helps ensure we are actually tackling the problem of Chinese control of the supply chain in a way that takes into account things like intellectual property and market-based risk, not just ownership,” Wulf said.
“It also helps protect the early-mover corporates in more advanced stages of their projects that are now facing pushback for their dealings with Chinese companies despite having had no other option when they started out. If we had a more nuanced approach, this might change,” she added.
The FEOC issue has inevitably sparked an ongoing debate around Indonesia, which is on track to account for 60% of the global nickel supply by 2025 and 75% of the global nickel supply by 2030, making the country’s minerals critical to the production of batteries for EVs.
But the bulk of Indonesian nickel projects have a Chinese and an Indonesian shareholding base – normally Indonesian in the mining phase and Chinese in the smelting/refining phases.
At the same time, there are concerns over the sustainability practices in place at many of these operations, with a number of red flags raised related to labor standards, waste management, carbon emissions and biodiversity impacts.
These apprehensions come while Indonesia is seeking a limited free trade agreement (FTA) with the US.
Wulf said it is possible to make cases for and against working more closely with Indonesia from a national security perspective.
“On the one hand, there’s so much Chinese investment in Indonesia, so one could argue that the US should be doing more to offer an olive branch to Indonesia to move it away from China’s sphere of influence,” she told Fastmarkets.
“But if the goal is to diversify the supply chain, we don’t need more Indonesian nickel. Indonesia already accounts for about half of global nickel production, and 90% of all planned nickel processing facilities are in Indonesia – many with Chinese control,” she added.
Targets and CMAs
According to Wulf, SAFE has conducted analysis of the extent to which the US’ mineral goals were achievable through working with FTA countries as well as with major allies such as North Atlantic Treaty Organization (NATO) partners.
The focus of the study was on nickel cobalt manganese (NCM) batteries, which dominate battery chemistries in North America and Europe, rather than lithium iron phosphate (LFP) batteries, which are widely used in China.
LFP batteries are also popular in battery energy storage systems (BESS). Fastmarkets analyst Phoebe O’Hara forecasts that total BESS will expand to 2,520 GWh by 2033, with demand at 480GWh.
Meanwhile, China will take more than 35% of the BESS market in 2023, the United States 21% and Europe 18%, O’Hara estimated.
Acknowledging that US targets for critical minerals were “incredibly ambitious” to start with, Wulf said some goals would be achievable, while others would not.
“Based on 2022 mined production and US demand out through 2030, the US could easily hit its lithium and nickel targets, at least initially, but its cobalt targets could not be achieved,” she noted, adding: “Not to mention, this is based on US demand, which isn’t close to encompassing the entire picture.”
The US government is looking into adding more critical minerals agreements (CMAs) with its allies and expanding the definition of FTAs, Wulf noted.
“There are multiple groups lobbying to widen the tent of countries,” she said.
However, with the US presidential election looming in 2024, there is concern among the country partners that work put into those kinds of agreements could be nullified if there is a change in office, she added.
“It has made other countries very hesitant to give concessions within existing agreements and made it questionable as to whether it is possible to widen the tent further,” she said.
“The pushback from Congress has been important too – the pressure that arose after the CMA with Japan was signed has seemed to slow the creation of other CMAs, although the administration has said they will do one with the UK and is working on one with the EU,” Wulf added.
In March, Japan and the US signed a CMA securing both countries’ commitment to strengthen supply chains and promote EV battery technologies. The CMA allows minerals from Japan to meet sourcing requirements for US EV tax credits, unlocking up to $7,500 per vehicle.
The agreement has come under fire from some members of Congress for the lack of binding or enforceable commitments, particularly on labor and environmental standards.
Supply chain security
Noting the importance of critical minerals as the transition is made to an electric world, Wulf stressed the importance of putting supply chain security at the forefront of legislation and other incentives.
“The EU and other auto-forward consuming nations need to get on board with the fact that this isn’t just about sustainability; it’s also about security. All their incentives are focused on greenhouse gas emissions, recycled content requirements and so on,” she told Fastmarkets.
“While this sustainability focus is critical in the global race to the top, we need to remember that the goal is also security and that we are dealing with China, a planned economy, non-market actor, which is very invested in maintaining control over the supply chain,” she said.
This could lead to a division among environmental, social and governance (ESG) criteria, depending on the nation involved, Wulf noted, with some countries more willing to turn a blind eye to sourcing minerals produced using lower standards than others, for example.
“China will happily bifurcate its supply chain to sell the products that meet ESG requirements to the West while continuing to sell less sustainably-made products to those who want them,” she said.
Other issues include the fact that EU recycled content requirements are too steep and too early for participants outside China because they do not yet have the spent batteries to recycle, while there also needs to be a uniform FEOC in the EU, Japan and South Korea, she noted.