The Risks and Opportunities of the Inflation Reduction Act for the Cobalt Value Chain
To advance America’s transition to cleaner energy over the next decade and beyond, this past August, U.S. President Joe Biden signed into law the Inflation Reduction Act (IRA). New financial measures including tax cuts aim to support the energy transition and decrease the energy costs for consumers. Critically, the Act will result in an investment of $369bn in energy security and climate change programmes. The transition will require the development and processing of substantial amounts of critical minerals, including cobalt.
To help boost electric vehicle (EV) sales and use in the U.S., the new law provides tax credits of up to $7,500 to buyers of new vehicles. Legislators included certain restrictions including limits on the income of buyers and the cost of the vehicles to ensure that the right incentives are given to the consumers. In addition to increasing EV purchases and speeding the transition to electricity, policymakers intended for the new law to strengthen and grow American supply chains bring back manufacturers that had moved overseas and create new jobs. To accomplish those goals, Congress included provisions to ensure that new EVs would be eligible for tax credits only if they met certain manufacturing requirements.
While well-intended, given North America’s limited deposits of numerous critical minerals, these requirements may slow down the rapid deployment of EVs and be challenging to the cobalt value chain and cobalt-rich nations. For example, to qualify for the $7,500 credit, starting in 2023, 40% of the critical minerals (by value) of EV batteries will need to be either extracted or processed in North America or in a Free Trade Agreement (FTA) partner country. Still to be decided is the definition of a “free trade agreement” (FTA) partner (as there is currently no legal definition) and exactly how the value of the various minerals, including cobalt, will be determined. To encourage greater use of materials from domestic supplies or FTA nations, the critical mineral requirement rises to 80% in 2027. However, the U.S. Treasury Department is still reviewing the question of how extraction versus processing values for various minerals will be calculated.
The new law also imposes minimum requirements on the battery components themselves. Beginning next year, 50% of EV battery components must either be manufactured or assembled in North America. How Treasury defines battery components will be key to this requirement and determine how much of the manufacturing and/or assembly process needs to be based in North America. It’s also important because the battery component threshold increases over time, rising to 100% by 2029.
The Inflation Reduction Act is one of the United States’ most significant and impactful climate laws. Cobalt is a critical mineral that is essential for this energy transition, given its use in batteries, especially those used in EVs. The Democratic Republic of the Congo (DRC) constitutes about 46% (3.5 million tonnes) of known economically extractable cobalt reserves. Australia has the second largest reserves, representing about 18.5% (1,9 million tonnes). Other potential major sources include Indonesia (~8%), the Philippines (~3.5%) and Canada (~3%). The United States has about 69k tonnes reserves.
It is likely that the US would need to rely on a combination of primary material from partners and recycling of cobalt to achieve self-sufficiency. For this reason, it is critical that there is a flexible model for the definition of “free trade agreement” given cobalt containing countries the possibility to be included in the FTA due to their strategic importance and mineral wealth.
Currently, political leaders around the world discussing the IRA and the implementation of the EV Tax Credit. It was inter alia topic at the EU-US Trade and Technology Council, and it will most likely be addressed at the U.S.-Africa Leaders’ Summit from 13-15 December. Over the next several months, US federal agencies will be crafting the guidance, regulations, and programs that will implement this legislation. As this process unfolds and its effects become clearer, the Cobalt Institute will continue to represent the cobalt value chain, monitor and have conversations with political stakeholders on the IRA.