By Favoring Allies, Inflation Reduction Act Could Delay Decarbonization Efforts
A recent supply chain shortage is on the horizon, and it impacts the international effort to curb global warming.
To construct the technologies obligatory to cut back global greenhouse gas emissions — comparable to electric vehicle (EV) batteries, photovoltaic solar systems, and wind turbines — manufacturers need resources called critical minerals. These materials, comparable to copper, lithium, nickel, cobalt, and other earth elements, are considered “critical” because they’re essential to our world economy and the shift to renewable energy. Unfortunately, their supply chains are easily disrupted — and recent regulations under the Inflation Reduction Act limit the pathways to amass them, potentially delaying the clean energy transition.
Global demand for critical minerals will increase 400-600% over the subsequent several many years. Yet only a handful of nations produce, refine and manufacture the world’s supply. That features the Democratic Republic of Congo, with around 70% of worldwide cobalt mining, and China with half of the world’s rare earth metal production and about two-thirds of all lithium-ion factories. This concentration is a component of what makes critical supply chains so vulnerable to disruption, whether attributable to political turmoil or pandemics.
The concept of “ally-shoring,” or sourcing in friendly and democratic countries, has emerged within the US as a possible pathway to strengthen these brittle supply chains. It requires nations to deepen relationships with trusted allies, and to deliberately source essential materials, goods, and services with countries that share democratic commitments in addition to transparent and well-governed trade regimes.
The 2022 Inflation Reduction Act (IRA) attempts to ally-shore critical minerals supply. The bill creates roughly $369 billion in tax credits and funding to support the production of EVs, renewable energy technologies, and demanding minerals. Undoubtedly, the IRA is a huge win for the climate, with provisions to cut back a couple of gigaton of greenhouse gas emissions in 2030 and reach net-zero emissions by 2050. However the ally-shoring approach proposed within the IRA fails to support predicted critical mineral demand, and will even delay the timeline for decarbonization.
Let’s take a have a look at how the IRA would impact EV production within the U.S. With a view to qualify for a $7,500 federal electric vehicle tax credit, EV manufacturers must complete final assembly of the vehicle in North America. Manufacturers must also satisfy critical mineral and battery component requirements. Specifically, manufacturers can only claim tax credits if 40% of critical minerals contained in batteries are extracted or processed within the US or any country with which the US has a free trade agreement. That sourcing percentage increases to 80% in 2027. For other battery components, manufacturers can claim a tax credit if 50% of components are manufactured or assembled in North America. That rate increases to 100% by 2029.
Now let’s consider how these requirements will impact the present supply chain. The IRA would immediately disqualify 70% of the present 72 electric vehicle brands currently available, in line with Alliance for Automotive Innovation CEO John Bozzella. The US is just not capable of supplying sufficient critical materials and batteries domestically, Bozzella wrote. He argues the ally-shoring approach of the IRA is simply too selective, discounting countries friendly to the US. The EU agrees on this point, claiming the IRA’s incentives discriminate against the EU and other U.S. trading partners. The IRA also limits the usage of critical minerals from “entities of concern.” If China is granted such a designation, the clean vehicle credit scheme would exclude 75% of the world’s battery cell manufacturing capability.
The IRA’s ally-shoring approach doesn’t account for the rapid pace at which critical mineral demand will grow. Lithium demand alone is predicted to extend 40 times by 2040, and the IRA’s sourcing requirements discount major sources with no viable technique of replacing them.
An argument might be made that the ally-shoring approach helps to be sure that the minerals powering the clean energy transition are sourced from countries with ethical human rights and environmental protection practices. Nonetheless, free trade agreements don’t at all times guarantee improved mining practices. If environmental justice is the goal, the IRA would do higher to require minerals to be sourced from mines with a third-party verification of sustainable and ethical practices, much like LEED certifications for buildings.
But this doesn’t mean ally-shoring can’t play a job in bolstering critical mineral supply chains. To forestall slowing down the clean energy transition with supply chain disruption, the US should expand its net for countries considered within the IRA’s ally-shoring approach. Bozzella suggests including nations with collective defense arrangements with the USA, comparable to NATO member Japan. Asian countries comparable to the Philippines, Vietnam, Indonesia, India, and Bangladesh have the aptitude to play a bigger role in the worldwide supply chain. Some, comparable to Vietnam, have already emerged as a top alternative for U.S. manufacturers looking for to maneuver their supply chain out of China.
Broadening the list of eligible countries will allow the U.S. to reduce reliance on China more quickly. To do that, the U.S. can leverage the private sector leadership of corporations comparable to Google and Apple, that are already diversifying their supply chains away from China and into friendly Asian countries.
By expanding the list of ally-shoring partners and leveraging public-private partnerships, the U.S. can avoid accusations of trade protectionism and bolster the critical mineral supply chains essential to addressing the climate crisis.
Julia-Grace Sanders is a graduate student in Columbia University’s MPA in Environmental Science and Policy program.