Strengthening the US Supply Chain for Critical Minerals and the Inflation Reduction Act – Opportunities and Challenges
As the Biden-Harris administration focuses on the clean energy transition, it has emphasized the need to strengthen the US supply chain for critical minerals. The Energy Act of 2020 defines a critical mineral as a non-fuel mineral or mineral material essential to the economic or national security of the United States and which has a supply chain vulnerable to disruption. These critical minerals such as lithium, cobalt, nickel and graphite are the key minerals for electric vehicle and cell phone batteries. For years, the United States has relied heavily on imports of these minerals from China and Russia, and as the world transitions to green energy, reports have shown that the global demand for these minerals has the potential to increase 400–600 percent.1
The Biden-Harris administration has also suggested that the law governing the extraction and processing of these critical minerals, the Mining Law of 1872, is outdated. There is also no one federal agency that oversees domestic mining. In connection with ramping up its critical minerals strategy, the administration has decided it is time to update the 150-year-old mining laws and regulations and on February 22, 2022, created the Interagency Working Group (“IWG”) to lead the effort.2 The IWG has released 11 fundamental principles for domestic mining reform that have given us an outline of its intended recommendations to Congress due this November. The IWG is hosting roundtables and requesting comments and feedback from government groups, experts in the mining industry, scientists, tribal nations, and others to help it gather information and perspectives that it will use to suggest improvements and best practices to update the mining rules and policies. On May 11, 2022, the IWG hosted its first meeting with over 20 representatives from the groups described above in an effort to “establish strong, 21st Century environmental and engagement standards that would allow for responsible and sustainable development of hardrock minerals.”3
In March of this year, President Biden also invoked the Defense Production Act (“DPA”) to “boost mineral development… and provide federal money to help jump-start new mines or expand existing ones.”4 He also directed the Department of Defense to consider lithium, cobalt, graphite, nickel and manganese as essential to national security. The DPA gives the president authority to use economic incentives to boost the critical mineral supply.
Most recently, on August 16, 2022, President Biden signed into law the Inflation Reduction Act (“IRA”), which includes extensive provisions relating to green energy tax incentives, including several incentives to strengthen the US supply chain for critical minerals.5 Notably, the IRA created a new advanced manufacturing production tax credit for taxpayers that produce certain eligible components, including critical minerals, in the United States that are then sold to an unrelated person.6 The amount of the credit varies significantly depending on the component produced, but for critical minerals, the credit is equal to 10 percent of the costs incurred by the taxpayer with respect to the production of these minerals. The tax credits can also be stacked, so a company can get a credit for mining the minerals and also refining the minerals. The tax credit is available with respect to components sold after December 31, 2022, and for many downstream products (solar energy components, wind energy components, power inverters and battery components), the tax credit begins phasing out in 2030 and is not available after 2032, except there is no phaseout for the production of critical minerals. The IRA also significantly revised the existing tax credit for purchases of new electric vehicles but conditioned receipt of some or all of the credit on the sourcing of critical minerals of the electric vehicle batteries.7 For qualifying purchasers of electric vehicles, the tax credit could be up to $7,500. However, half of the credit is conditioned on a certain percentage of the critical minerals in the electric vehicle battery being either (i) extracted or processed in the United States or in a country that has a free trade agreement with the United States or (ii) recycled in North America. Further, starting in 2025, an electric vehicle battery may not contain any critical minerals that were extracted, processed or recycled by a “foreign entity of concern.” Finally, the IRA also appropriated up to $500 million for the “enhanced use” of the DPA to assist with strengthening the US supply chain for critical minerals.
While the goal of the tax incentives in the IRA is to assist US mining companies with producing critical minerals, mainly lithium for electronic vehicles, and to discourage the sourcing of these minerals from certain other parts of the world, there really is no quick solution here to the supply chain problem. Considering that the developed battery industry sits largely in Asia, it will take our US markets some time to ramp up.
Some politicians have even suggested mining the seabed floor for lithium and graphite to meet the expected demands for these metals, and a Canadian minerals firm was just recently given permission by the International Seabed Authority for exploration of the seabed between Hawaii and Mexico, but some states such as Oregon and Washington are enacting bans on seabed mining altogether.8 More recently, the State of California passed a bill stating that seabed mineral mining is not permitted off of its coast with one of the reasons being inferred that “its state waters do not represent a marketable source for battery minerals.”9
Is the excitement about the IRA and this new tax credit in the mining industry misplaced? Are the mining companies reacting too soon? Will existing or new mining companies be able to take advantage of these new tax incentives? And, lest we forget, other roadblocks lie ahead of mining companies with the mine planning and approval process.
Assuming a new mining company can take advantage of the new tax credit, it will likely have other major hurdles to clear before being able to commence its project. One of the major roadblocks in the industry is obtaining the necessary permits to begin extracting minerals from the ground, which in the United States can take up to several years to obtain. If the mine is located on federal lands, the company will need to get the green light from the Bureau of Land Management (“BLM”) before it receives its necessary permits. In addition to working with the BLM, a mining company will also need to work with several other governmental agencies to ensure compliance with applicable laws such as the National Environmental Policy Act (“NEPA”), the Clean Water Act, the Clean Air Act and the Endangered Species Act. Mining companies face protracted delays in getting permitting approval, and over the last few years, mine approvals have decreased dramatically. In 2020, 20 Mine Plans were approved while as of earlier this summer, only six Mine Plans had been approved for the year.10 While one of the IWG fundamentals is to “provide permitting certainty” with the help of “interagency cooperation and coordination during environmental review and permitting” and the new concept of a “Project Permitting Dashboard,” it remains to be seen if these efforts will be successful and result in more mine applications and approvals going forward.
On September 14, 2022, Senator Joe Manchin III, D-W.Va., released his long-awaited permitting legislation in an attempt to overhaul the energy and infrastructure permitting process. The draft bill, among other things, required President Biden to select 25 energy projects of strategic national importance and also created a new time frame for environmental reviews for energy projects including setting a two-year target for NEPA reviews. The bill was met with pushback from all sides, Republicans, Democrats and Progressives opposed the bill, and just shy of two weeks after it was released, Manchin dropped his bill so that a crucial funding bill could be passed to avoid government shutdown.11 It remains to be seen of what will come of Manchin’s permitting bill, but after the bill was dropped the White House press secretary released a statement saying “the president supports Senator Manchin’s plan because it is necessary for our energy security and to make more clean energy available to American people.”12
Perhaps existing mining companies can qualify to take advantage of this tax credit without having to re-work their current mine plan, but if a mining company cannot and has to apply for new permits, it may not be able to get approval fast enough to make the economics worth it.
Even if a mining company successfully secures the needed permits after an extensive review process, it may still have hurdles to face with opposition from environmental groups, Native American Tribes and local ranchers. Case in point is what happened with Lithium Americas, the developer of the Thacker Pass Mine, which sits on one of the largest lithium deposits in the United States. The company submitted its permitting application in April 2020; received its air, water and mining permits in February 2022; and then had to fight legal battles with various groups challenging or appealing its permits. The company has also agreed to set aside $47 million in financial assurance to guarantee revitalization of the site after the mine closes.
It remains to be seen how the mining laws will be updated and whether they will be considerate of mining companies and encourage growth in the industry or—perhaps in an effort to prioritize strong environmental standards—the new regulations will be more burdensome on mining companies, requiring royalties for extraction and hefty reclamation deposits. It will also be interesting to see how utilized this tax credit will be and if it does, in fact, incentivize new mining activity by either new mining companies or existing companies. But for now, maybe this excitement should be balanced out with some of the unfortunate current realities of the mining industry.
1 See Fact Sheet: Securing a Made in America Supply Chain for Critical Minerals, The White House, February 22, 2022, Statements and Releases.
2 See the Mayer Brown Legal Update US Department of the Interior Launches Interagency Working Group for Mining Law Reform, February 28, 2022, J. Paul Forrester.
3 See Readout of the White House’s First Stakeholder Convening on Mining Reform, May 11, 2022.
4 See Biden’s Defense Production Act Order Promises Money to Miners, E&E News, Greenwire, April 4, 2022, Jael Holzman.
5 See the Mayer Brown Legal Update The Green Energy Tax Incentives of the Inflation Reduction Act of 2022, August 2, 2022, Isaac L. Maron, Jeff G. Davis, Amanda L. Rosenberg, Daniel T. Kiely, and George K. Haines.
6 A taxpayer that sells a component to a related person will be treated as selling that component to an unrelated person if (i) the related person subsequently sells that component to an unrelated person or (ii) the taxpayer makes an election to deem that sale to be to an unrelated person. In the event that the taxpayer makes the election described above, the US Treasury may prescribe the form and manner in which that election is to be made and may require that information or registration as it deems necessary for purposes of preventing duplication or fraud.
7 See the Mayer Brown Legal Update Tax Credits for Electric Vehicles: What’s Changed with the US IRA? by Jeffrey G. Davis and Daniel T. Kiely.
8 See California Bans Coastal Seabed Mining, E&E News, Greenwire, September 26, 2022, Jael Holzman.
9 See Assembly Bill No. 1832 (Waters subject to tidal influence: hard mineral extraction), Chapter 433, Section 2(j).
10 See Biden Wants Minerals, But Mine Permitting Lags, E&E News, Greenwire, August 9, 2022, Jael Holzman, and Hannah Northey.
11 See Senate Moves Ahead on US Funding After Manchin Drops Energy Bid, Bloomberg, September 27, 2022, Eric Wasson, Laura Litvan, and Ari Natter.
