The Inflation Reduction Act established the Section 30D New Clean Vehicle Credit, which includes a $3,750 critical minerals tax credit for taxpayers who purchase qualifying, new electric vehicles. The credit is based on the electric vehicle battery meeting certain mineral content requirements. Specifically, the content of the value of the battery’s critical minerals from the United States and free trade agreement countries must be at least 40 percent for electric vehicles placed in service in 2023, 50 percent in 2024, 60 percent in 2025, 70 percent in 2026, and 80 percent in 2027 and onwards— and exclude any minerals from “foreign entities of concern.”
Earlier this month, the Department of the Treasury released its final rule on the critical minerals tax credit, and the Department of Energy released its final rule on the foreign entity of concern definition. US Senator Joe Manchin (D-WV), the tax credit’s key author, has noted that the final rules do not fulfill the original intent of the critical minerals tax credit to exclude entities tied to adversarial countries (e.g., foreign subsidiaries owned by Chinese companies) and to limit eligible foreign sources to countries with comprehensive US free trade agreements. Receiving less attention, however, is how the final rules do not fulfill the original intent of the critical minerals tax credit to promote US mineral production over foreign mineral production.
Indeed, Manchin said the core purpose of the critical minerals tax credit was “to promote domestic production of critical minerals.” Yet, under the final rules, minerals extracted or processed in eligible foreign countries receive the same treatment as those extracted or processed in the United States, failing to substantially incentivize domestic mineral production over foreign mineral production. Additionally, some eligible foreign mineral producers, such as those in Chile, have lower capital and operating costs than US mineral producers due to lower environmental and labor standards, which enable the foreign producers to offer lower mineral prices. Since automakers in the United States will likely seek the cheapest minerals that qualify their electric vehicles for the critical minerals tax credit, the tax credit rule could incentivize demand for cheaper, foreign-produced minerals over US-produced minerals.
Policy Options To Strengthen the Tax Credit
The following rule proposals seek to increase US mineral production. While these recommendations are rigorous (and some may even consider radical), “The purpose of the tax credit is no longer to promote the purchase and use of electric vehicles without regard to supply chains, but to promote reliable domestic [emphasis added] supply chains for the critical minerals and battery components needed to power electric vehicles,” as Manchin noted. In other words, the tax credit’s primary aim is to incentivize domestic-centered mineral supply chains, not electric vehicle adoption. Therefore, the critical minerals tax credit should seek, above all, to incentivize domestic mineral production. Given the Biden Administration’s aim to provide more tax credits for purchasing electric vehicles and hence expand the eligible foreign sources to more countries, the following three policy proposals are likely infeasible under the current administration. Still, these three recommendations offer insight into how updated rules for the Section 30D tax credit could better promote domestic mineral production.
First, to encourage domestic mineral extraction over foreign mineral extraction, the US government should disqualify extracted foreign minerals from contributing to the content requirements for the critical minerals tax credit if those minerals have reserves in the United States. To illustrate, the United States has nickel reserves, which means all nickel extracted outside the United States would be disqualified from contributing to the content requirements of the minerals tax credit. Otherwise, cheaper nickel from eligible foreign countries like Colombia and Guatemala could satisfy the US automotive industry’s nickel demand, displacing demand for US nickel production. While the United States lacks enough nickel reserves to meet demand from electric vehicle production, the primary purpose of the tax credit is to promote domestic mineral production, not foreign mineral production to supply US electric vehicle manufacturing. Under this proposed policy, Americans can still purchase electric vehicles with batteries containing minerals with US reserves but extracted overseas, yet these foreign minerals would not contribute to the content requirements of the critical minerals tax credit.
Importantly, this policy of disqualifying extracted foreign minerals from contributing to the content requirements of the critical minerals tax credit if those minerals have US reserves should encourage investment in US mineral projects. Many automakers and battery manufacturers are now investing in mineral projects to secure sufficient mineral supplies. If an automaker had the choice to invest in either a Canadian mineral project or an American project with the same characteristics but slightly higher costs, the automaker would likely invest in the Canadian mineral project. By having greater incentives for US mineral projects over foreign mineral projects, the tax credit would support the law’s intent to promote domestic mineral production. Notably, this policy would also incentivize US mineral exploration because once US reserves of a mineral are discovered, overseas supplies of that mineral no longer contribute to the content requirements of the critical minerals tax credit, giving the US reserves significant value.
Second, for minerals lacking reserves in the United States (e.g., manganese), the US government should allow extracted minerals from certain foreign countries to contribute to the critical minerals tax credit content requirements. For these foreign minerals, however, the US government should incentivize the most resilient mineral supply chains by only deeming minerals eligible from countries based on countries’ order of supply chain resilience. Supply chain resilience rankings could be undertaken by the US Geological Survey and consider factors like a country’s proximity to the United States, size of mineral reserves, and political risks. For example, manganese reserves are located in both Australia and Mexico, but given Australia’s larger reserves and lower political risks, manganese extracted in Australia, not Mexico, would be eligible to contribute to the content requirements for the critical minerals tax credit.
Sometimes, extracted minerals from multiple foreign countries would be eligible to contribute to the content requirements for the tax credit. For instance, the United States has no production and lacks reserves of natural graphite, while both Canada and Norway have relatively small natural graphite production. In this case, natural graphite produced in both Canada and Norway would be eligible to contribute to the content requirements of the critical minerals tax credit.
While the assessment of countries’ supply chain resilience varies by the mineral, the order of countries with the most resilient to the least resilient supply chains to the United States is generally the following: Canada, Australia, free trade agreement countries in the Western Hemisphere, Morocco, South Korea, and other free trade agreement countries. The reason why US supply chains with Australia are more resilient than US supply chains with Mexico and other Western Hemisphere countries (excluding Canada) is the greater political risks in these other countries, such as forced government shutdowns and nationalization of mining assets. Additionally, US supply chains with Morocco are more resilient than US supply chains with South Korea because US sea lanes with East Asia face high disruption risks in a potential US-China conflict, which is an increasing risk this decade.
Third, to promote domestic mineral processing over foreign mineral processing, the US government should disqualify all foreign-processed battery materials (e.g., nickel sulfate) from contributing to the content requirements of the critical minerals tax credit. Processing is not geologically constrained, while mining is; consequently, the United States can establish domestic processing capacity regardless of its mineral reserves by increasing domestic mineral extraction and importing extracted minerals from overseas. For example, in 2022, China only had 1.7 percent of global cobalt reserves; yet, China had 75 percent of global cobalt refining. Under this policy, Americans can still purchase electric vehicles with batteries excluding US-processed minerals, but these foreign minerals would not contribute to the content requirements of the critical minerals tax credit.
One counterargument to these rule changes for promoting domestic mineral production is that the United States alone does not have enough mineral reserves to meet mineral demand from US electric vehicle production. This statement is true. Therefore, the counterargument continues, minerals produced in US free trade agreement countries would help support US electric vehicle production and should be eligible to contribute to the content requirements of the critical minerals tax credit, encouraging investment in these free trade agreement countries rather than riskier, China-friendly jurisdictions like Indonesia. Yet again, the purpose of the critical minerals tax credit is to incentivize domestic mineral production—regardless of the inability of domestic mineral reserves to fully satisfy mineral demand from US electric vehicle production. With greater incentives for electric vehicles with batteries containing US-produced minerals over foreign-produced minerals, US mineral projects should attract more capital, ultimately increasing domestic mineral production. Furthermore, mineral producers are already incentivized to extract and process minerals in free trade agreement countries like Canada because their mineral exports can enter the US market at low tariff rates.
The Law’s Original Intent Must Be Fulfilled
In conclusion, the final rules on the Section 30D tax credit do not fulfill the law’s original intent to promote domestic mineral production. To fulfill the law’s original intent, the US government should (1) disqualify extracted foreign minerals from contributing to the content requirements of the critical minerals tax credit if those minerals have US reserves, (2) allow extracted minerals from certain foreign countries to contribute to the content requirements of the critical minerals tax credit if those minerals lack US reserves, and (3) disqualify all foreign-processed battery materials from contributing to the content requirements of the critical minerals tax credit.
