Inflation Reduction Act Accelerates Market for Critical Metals in EV Batteries

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The Inflation Reduction Act is expected to have a significant impact on the U.S. EV market in the coming years, driving increased sales and, in turn, the demand for components like batteries. While these circumstances present some clear benefits to the industry, there are some challenges to consider.

Below is an overview of the Inflation Reduction Act, including key legislation, long-term goals, and primary beneficiaries, as well as how the act impacts the EV battery market.

What Is the Inflation Reduction Act?

On August 7, the Senate passed the Inflation Reduction Act, which is designed to reduce living costs for American families while fighting inflation and reducing the deficit. It will expand affordable healthcare coverage, cap the price of insulin, and lower energy costs.

It also makes historic investments to address the climate crisis, pledging to reduce carbon pollution by 40% by 2030 and accelerate the transition to clean energy. The $369 billion in climate and clean energy provisions is the largest investment in combating climate change ever passed by Congress.

The Inflation Reduction Act is fiscally responsible and fully paid for. However, rather than raising taxes on middle-income families and small businesses, it ensures that largely profitable corporations and individuals pay their share of taxes. For example, corporations that make a profit of at least $1 billion per year will be issued a 15% minimum tax.

Some industrial businesses will also be beneficiaries of the bill. Tax credits will be awarded to those who make significant investments in green energy, such as electrifying fleets.

Meanwhile, investments in new manufacturing facilities and efforts to support the production of technologies on home soil will strengthen domestic supply chains, create millions of jobs, and boost American competitiveness.

How Will the Inflation Reduction Act Accelerate the Market for Critical Metals in EV Batteries?

Legislation within the Inflation Reduction Act that is designed to accelerate transportation electrification has large implications for the EV industry as a whole.

It includes an extension to the light-duty EV tax credit, which awards up to $7,500 per vehicle at the point of sale through 2032. A cap that previously limited tax credited sales-per-automaker to 200,000 has also been rescinded, benefitting the likes of Tesla and General Motors.

In addition, commercial EVs will be eligible for federal tax credits for the first time. Specifically, $3 billion will go to the U.S. Postal Service to electrify their fleet, and $1 billion will go to states, municipalities, Indian tribes, or non-profit school transportation associations to replace class six and seven heavy-duty vehicles with clean EVs.

But there are some important stipulations in the legislation.

For starters, the light-duty EV tax credit has an income cap, which means customers won’t qualify if they earn more than $150,000. It is hoped this will incentivize automakers to reduce the prices of EVs to reach a wider and more diverse customer base. The total EV market share reached just 6% in October 2022, a long way from the 2030 goal of 50%.

As of 2023, automakers must also source or process at least 40% of their EV battery components in the U.S. or countries with which the U.S. has a free trade agreement. That increases to 50% in 2024, 80% in 2027, and 100% by 2029. These conditions, and an additional one that requires the final assembly of EVs to take place in North America, will incentivize automakers to reshore supply chains.

This spells good news for the U.S. manufacturing industry. But can suppliers of EV battery components keep up with a sudden surge in demand?

Meeting the Demand for EV Battery Materials

EV batteries are composed of minerals like lithium, cobalt, manganese, nickel, graphite, and, increasingly, copper, most of which are sourced and processed overseas. Currently, the U.S. falls behind Europe and China in battery manufacturing.

As the U.S. increases its competitiveness and reshores operations, there are concerns that there needs to be more mines to keep up with increased demand.

The copper supply chain faces especially significant challenges. By 2030, supply from existing and projected global copper mining activities will meet just 80% of our needs, driving prices up to record highs.

Automakers want to capitalize on the tax credits laid out in the Inflation Reduction Act, but the question is how EV battery makers can diversify supply chains to accommodate it.

Recycling

One answer lies in recycling. Some businesses are already in the process of expanding their facilities to accommodate large-scale battery recycling operations. Ascend Elements, for example, is opening its first commercial-scale EV battery recycling facility in Georgia. Processing plants can be established much more efficiently than new mines, so investments like this will fill critical supply chain gaps in the short term.

Devices such as laptops, cell phones, and electric bicycles can also be recycled to provide some of the critical minerals needed for EV batteries.

Domestic Facilities

Other U.S. businesses are establishing domestic copper production facilities in anticipation of ongoing supply chain shortages. Denkai America, for example, announced the details of a $430 million project to establish a new North American headquarters last year.

Changes to EV Batteries

A longer-term impact of the Inflation Reduction Act may be changes to EV battery composition. This could reduce dependency on certain hard-to-get materials and see increased use of domestically produced and processed materials.

It certainly helps that the act qualifies Free Trade Agreement (FTA) countries as sources of mineral supply. But, although this presents some alternate opportunities for EV battery manufacturers, there are several key players with which no FTA agreement exists. Argentina — a top-five global producer of lithium — is one such example.

The Inflation Reduction Act will disrupt global supply chains and accelerate domestic production in the months and years to come.