If you are a regular CleanTechnica reader, you know the US Treasury and the IRS are busier than the robots at a Tesla Gigafactory. They are under pressure to release the draft rules that will determine who is eligible for the billions of dollars of federal tax credits baked into the Inflation Reduction Act. Those rules were intended to be in place by the end of 2022, but there simply wasn’t time, so Treasury said it would need at least until the end of March to get the job done. That means they have until Friday of this week. They may or may not make their self-imposed deadline.
After the rules are announced in draft form, there will be a 30 day public comment period, after which the rules may be tweaked a bit here and there to address concerns raised in the comments. Then the final rules will be promulgated and that will be that. Everyone will know precisely what they must do to qualify for each of the incentives in the IRA.
What Does The IRA Say?
The Inflation Reduction Act represents a grand compromise between Senate majority leader Chuck Schumer and West Virginia senator Joe Manchin. The key to the compromise was to “reshore” American jobs that had gravitated to foreign countries during the time when globalization was considered a wonderful thing. Let the peasants abroad work their fingers to the bone for low wages while we wealthy Americans enjoy the blessings of liberty and low prices.
The problem, of course, is that China seized the opportunity presented to it and promoted the industries that are essential to most clean technologies. In particular, China now dominates the battery supply chain, from digging raw materials out of the ground to converting them into battery materials and then using them to manufacture batteries.
When America awoke from its long winter’s nap and went to the cupboard to find its own battery supply chain, it was shocked — SHOCKED! — to find the cupboard was bare. The IRA is intended to fix all that by requiring those who want the goodies from Uncle Sugar contained in the IRA to do their business in the US, or at least with its friends. The main idea is to cut China out of the loop, which is hard when China is the 800-pound gorilla in the room.
The problem, as anyone can see, is the US doesn’t manufacture stuff anymore. There are no steel mills glowing red hot in the night skies over Pittsburgh. Many of the vehicles sold in America are manufactured somewhere else, primarily Japan, South Korea, and Germany. Now, to reap the rewards in the IRA, those cars need to be finally assembled in America with materials and components sourced in America as well. That was the intention, anyway, and it is the key to the compromise that brought Joe Manchin on board.
In general, the IRA says that A.) eligible cars must have the US as their final assembly point, B.) 40% of the “critical minerals” in batteries for those cars must be sourced from within the US or come from a nation that has a free trade agreement with America. That percentage rises each year and will stabilize at 80% by 2027, and C.) a certain percentage of the “manufactured components” that go into a battery pack — electrodes, solvents, additives, salts, battery cells, and the modules that hold the cells — must be produced in the US or come from approved sources.
To get any IRA dollars, a car must comply with A. To get half of the IRA tax credit, it must comply either with Part B or Part C. To get all of the IRA tax credit, it must comply with both B and C. But the IRA tax credit is only part of the picture. The companies that provide the qualifying “critical minerals” and the “manufactured components” are also eligible for production tax credits that could be worth billions of dollars in their own right.
With all that money on the table, it is inevitable that squabbling would take place. The South Koreans are annoyed because they don’t manufacture many electric cars in America (that will change in a few years) and so they are cut out of the loop. The Europeans are annoyed because they have developed a battery supply chain within the EU — they also are concerned that China will preempt all their local manufacturing ability — but by definition their supply chain is not located in the US.
Are Cathodes Battery Materials?
According to Politico, the Biden administration may allow European companies to share in billions of dollars in US tax incentives for electric vehicles if the two sides can reach a trade deal in the next few weeks, a senior administration official said Friday. That won’t happen in the draft regulations due later this week, however. But sources say ongoing talks between the US and the EU could produce an agreement allowing vehicles that include European minerals to qualify for the full extent of the tax breaks. How would that work?
They say that only lawyers and painters can turn black to white, but regulators should probably be included in that group as well. While cathode and anode materials are clearly categorized as battery components in one section of the law, the category isn’t explicitly defined in another part of the law that addresses the consumer subsidy. Ah, hah! A loophole!
In a white paper released last December, the Treasury Department created a third category of products called “constituent materials” which are mostly just anode and cathode materials. These would be treated like critical minerals — that is, obtainable from other partner countries — until the point when they are adhered to metal foils. Only then would they graduate to the stricter North American “manufactured components” category.
Shifting cathode and anode materials into the “critical minerals” calculation would make the provenance of individual battery components all but irrelevant, according to data from BloombergNEF. Autoblog says that as long as battery cells and modules are produced in North America, that would comprise essentially all of the battery’s “component” value, 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
Let The Battery Lobbying Wars Begin
Thomas Conway, international president of the United Steelworkers, the largest industrial union in North America, said Treasury “should keep with the direction it received from Congress.” In a letter to Treasury Secretary Janet Yellen on March 7, he wrote, “This expansion could damage the ability of the United States to create thousands of jobs in the supply chain for batteries.”
JB Straubel, former Tesla CTO and founder of Redwood Materials, said this week that the proposed third category — which US automakers are in favor of — would cut the legs out from under companies that are planning to build battery supply chain and manufacturing capacity in the US in order to comply with the spirit of the law as written. Redwood Materials is one of those companies and has just been approved for a $2 billion conditional loan from the US Department of Energy to create a battery factory in Nevada. “There are specific factories — and there are thousands of jobs tied to those — that are hanging in the balance,” Straubel said.
European Commission president Ursula von der Leyen visited Washington recently to lobby President Biden to relax the rules as they apply to the EU. If the U.S. and EU can successfully conclude those discussions in the next few weeks, the EU could be granted a special free trade partner status for critical minerals under the climate law — an idea that was first laid out in a white paper released by Treasury late last year. The US and EU do not now have a free trade agreement, according to Politico, primarily because they have been such long term trading partners that no one thought there was a need for one.
The question now is whether the administration can grant free trade status to any nation or group of nations without Senate approval. The Constitution does say that any treaties need the “advice and consent” of the Senate. That puts Joe Manchin back in the spotlight, as his vote would be crucial if the matter comes back up before the Senate. But in remarks last week, Manchin said, “I don’t have a problem with EU — our allies, I have no problem with that.”
In politics, there are always winners and losers. In the grand scheme of things, getting more electric vehicles on the road in America is a wonderful thing that falls into the category of “the greater good.” On the other hand, critical business decisions are now being put on hold while we await the final regulations from the Treasury department later this year. This ain’t over, in other words. We will do our best to keep our readers informed as this saga plays out in the next few months.
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