The Inflation Reduction Act includes a $7,500 tax credit for electric vehicles that requires portions of critical battery materials to be extracted or processed in the United States. While that may initially limit what vehicles can access the credits, analysts at BofA Global Research say the long-term impact could be changes to battery composition, including reduced use of cobalt, and the on-shoring of more domestic processing of critical materials.
To access the credits, by 2026, vehicles will need to have 80% of critical materials sourced domestically or from a country with which the U.S. has a free trade agreement.
“Hitting those thresholds will require major efforts,” according to a BofA Global Research report published last week. “Indeed, materials account for almost two-thirds of EV battery costs. Given where supply is coming from, the targets may be easiest to achieve for lithium and more difficult for nickel.”
Cobalt is “unlikely to make a meaningful contribution toward qualifying for the tax credit,” analysts said, as it is largely mined in the Democratic Republic of Congo and then processed in China. That could open the door for a higher penetration of lithium iron phosphate batteries, which do not contain nickel or cobalt.
“The industry needs to keep a focus on boosting lithium production, potentially also in the US,” BofA Global analysts added.
President Joe Biden has set a goal for half of all new passenger vehicle sales in the United States to be electric vehicles by 2030. Auto companies and industry analysts say it will be a heavy lift and requires development of new supply chains for raw materials alongside investments in charging infrastructure.
Global markets will likely remain tight going forward, BofA Global said. “To start with, there is immense competition for battery raw materials ... on current mine supply and EV production trajectories, we expect virtually every commodity to be undersupplied beyond 2025.”
The use of recycled batteries and critical components can also help manufacturers qualify vehicles for tax credits, and the U.S. Department of Energy on Monday said it is seeking comment on new programs to strengthen domestic battery recycling. The bipartisan infrastructure law included $335 million in investments over five years for lithium-ion battery recycling programs.
Responses to DOE’s request for information on battery recycling are due Oct. 14.