Critical Minerals and Electric Vehicle Battery Sourcing Requirements Under the IRA: Waiting With Bated Breath
On March 22, 2023, a senior official in the US Treasury Department (“Treasury”) stated that Treasury will release guidance regarding critical minerals and battery sourcing requirements for eligibility under the Inflation Reduction Act (“IRA”) enacted last August. The IRA includes approximately $369 billion in green energy tax incentives, including a new, advanced manufacturing production tax credit for taxpayers that produce critical minerals (such as mining companies) and credits promoting the sale of electric vehicles. Taxpayers and investors have been eagerly awaiting guidance from Treasury on the interpretation and implementation of these tax incentives. With the lithium market boom, the resulting demand for critical minerals being in full force and effect, and the focus on environmental, social and governance (“ESG”) issues and net zero carbon technologies, the growth in private investments in US clean energy projects is accelerating, but uncertainty remains on many of these eligibility requirements. Private companies have announced approximately $64 billion in new investments into more than 130 new clean energy projects since the passing of the IRA, and many believe there is room for much more funding.1
One of the key areas where taxpayers and investors are looking for guidance relates to the requirement under the IRA that a certain percentage of the critical minerals being used in electric vehicle batteries must be extracted or processed in the United States or a country that has a free trade agreement with the United States.2 Further, under the IRA and 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.” Currently, the developed battery industry largely sits in Asia, and some of the critical minerals needed for these batteries are currently not produced in the United States. There are also ally countries producing these critical minerals that the United States could cooperate or partner with but for which the IRA currently provides no tax incentives for cooperation or partnership. The requirement that the critical minerals must be produced in the United States or a country with which the United States has a free trade agreement immediately disqualified 70 percent of the existing 72 electric vehicle brands currently available, and is likely to be a hinderance to the United States being able to meet its decarbonization goals.3
On December 29, 2022, the Treasury released a white paper that anticipated next week’s proposed guidance on critical minerals and other requirements that vehicles must satisfy to be eligible for tax incentives.4 The white paper set forth that while the term “free trade agreement” is not defined in the IRA (or any other statute), the Treasury is expected to propose certain criteria making a free trade agreement eligible under the IRA, including “whether an agreement reduces or eliminates trade barriers on a preferential basis, commits the parties to refrain from imposing new trade barriers, establishes high-standard disciplines in key areas affecting trade (such as core labor and environmental protections), and/or reduces or eliminates restrictions on exports or commits the parties to refrain from imposing such restrictions, including for the critical minerals contained in electric vehicle batteries.”5 The Treasury also stated that it may identify additional free trade agreements or newly negotiated agreements with certain countries, suggesting that the Biden administration is considering expanding the list of countries that will be considered to have a free trade agreement with the United States.6
Although the official guidance on the sourcing of minerals was originally due last year, the delay was needed to address the complexities around sourcing requirements.7 The Treasury also remarked this week that any newly negotiated agreements the purposes of which is to meet the critical minerals requirement will also be considered for qualification as a free trade agreement, which is consistent with the December white paper.8 It is reasonable to assume that the “critical minerals agreement” recently discussed between President Biden and European Union President Ursula von der Leyen earlier this month will be deemed a free trade agreement.9 In an effort to help the United States boost its supply chains and keep its clean energy transition rapidly moving forward, the Biden administration has been exploring ways to expand this list of eligible countries even before Treasury issues its guidance. Once the new guidelines are released, there will be a public comment process, and stakeholders should robustly participate in that comment process if they are looking for beneficial changes to be made to these soon-to-be-implemented policies.
1 See Six Months in, the Inflation Reduction Act is already unleashing clean energy’s potential, The Hill, Opinion, Energy and Environment March 21, 2023, Bob Keefe.
2 See the Mayer Brown Legal Update Tax Credits for Electric Vehicles: What's Changed for the US IRA, September 9, 2022, by Daniel T. Kiely.
3 See By Favoring Allies, Inflation Reduction Act Could Delay Decarbonization Effects, Colombia Climate School, State of the Planet, Climate, January 13, 2023, Julia-Grace Sanders.
4 See Anticipated Direction of Forthcoming Proposed Guidance on Critical Mineral and Battery Component Value Calculations for the New Clean Vehicle Credit, The White House, Press Release, December 29, 2022.
7 See Treasury to release EV tax credit guidance next week, E&E News, March 22, 2023, Hannah Northey and Timothy Cama.
9 See Joint Statement by President Biden and President von der Leyen, The White House, Briefing Room, Statements and Releases, March 10, 2023.
