Inflation Reduction Act incentivizes U.S.-sourced minerals for clean energy

Does the Inflation Reduction Act Require Critical Minerals to Be Sourced Domestically?

Yes, to some extent. The Inflation Reduction Act explicitly requires domestic sourcing of critical minerals only for its electric vehicle tax credits. Other clean energy technologies (such as wind and solar) do not need to use domestically sourced minerals to qualify for the Investment Tax Credit (ITC) or Production Tax Credit (PTC). However, the act offers an additional 10% bonus credit to incentivize companies to incorporate U.S.-sourced critical minerals in all types of clean energy components.

Critical minerals sourcing requirements for EV tax credits

To receive the full value of the Inflation Reduction Act’s Clean Vehicle Tax Credit (up to $7,500 for qualified purchases), a portion of the vehicle’s critical minerals must have been extracted or processed in the United States or in a country with which the U.S. has a free trade agreement. Critical minerals recycled in North America can also fulfill this requirement. Vehicles placed in service before January 1, 2024 must contain at least 40% domestically sourced critical minerals to qualify; this ratchets up yearly through 2027, after which the percentage required is 80%.

Meeting critical minerals requirements accounts for half the value of the Clean Vehicle Tax Credit. The other half requires that a certain percentage of the vehicle’s battery components were manufactured or assembled in North America. At present, batteries must contain at least 50% domestically manufactured or assembled components; after 2027, this increases to 90%.

In addition, starting in 2025 for critical minerals and 2024 for battery components, no vehicle will qualify for the EV tax credit if any of these materials were sourced from a “foreign entity of concern,” such as China.

There is one exception, which provides a path for commercial vehicles to receive the full amount of the EV credit without requiring any domestic content.

Critical minerals sourcing for other clean energy technologies

The Inflation Reduction Act also offers an Advanced Manufacturing Production Tax Credit (AMPTC) for companies which domestically manufacture and sell clean energy technology. The AMPTC is a per-unit tax credit equal to 10% of the cost of production for each clean energy component domestically produced and sold by a manufacturer.

Fifty different critical minerals are listed in the Inflation Reduction Act as eligible “clean energy components,” meaning companies can claim the AMPTC when producing these minerals in the United States. There is no phaseout for the tax credit’s application to the production of critical minerals.

What Challenges Will the U.S. Face in Obtaining Critical Minerals?

As the U.S. evaluates how it can ensure a stable supply of critical minerals, it must grapple with a range of challenges. Two of the most difficult are that China controls the lion’s share of mineral processing capacity and that critical minerals mines have not, and cannot, live up to the desired zero-harm standard.

Supply chain vulnerability

The dominance of China in the critical minerals market is seen by some U.S. stakeholders as a significant threat to supply chains. While China corners the market in production of only two of these minerals, the processing situation is very different. China processes over 80% of all rare earth elements, over 60% of all cobalt, over 50% of all lithium and over 30% of all nickel.

Fear of supply chain risks is well-founded, as China has proved itself willing to wield this dominance as a political tool. For instance, in 2019, with the U.S.-China trade war intensifying, China threatened to cut off exports of rare earths to the United States. And in 2010, in retaliation for Japan’s holding of a Chinese fishing boat captain who was fishing in disputed waters, China did block exports of rare earths to Japan. These politically driven sales restrictions resulted in dramatic price spikes.

In considering how to address China’s dominance as well as the strictures of the Inflation Reduction Act, the U.S. should look for opportunities to support increased mining and processing facilities both domestically and in free trade agreement partner countries. The U.S. has free trade agreements with a few high-producing nations — including Australia, Chile and Peru — but oftentimes these nations still export to China for processing. Compared to mining, mineral processing has a smaller footprint with more manageable environmental risks, and processing facilities can be permitted and built more quickly.

Mining impacts

Mining, by its nature, is not a zero-harm activity. It poses significant risks to the environment and local communities, including air pollution, water depletion and pollution, and biodiversity loss.

Mining waste can also create significant risks; for example, improperly managed waste rock (overburden) can release acid mine drainage into the surrounding environment, and tailings impoundments (process waste) can sometimes leak and cause groundwater contamination. On occasion, catastrophic tailings dam failures occur, resulting in significant environmental harm and even loss of human life. Finally, there are social risks associated with mining, such as increased crime and gender-based violence.

In some cases, neighboring communities have been historically disenfranchised and not given the opportunity to participate in the licensing process. This can mean their objections and/or insights on how to best build projects or mitigate impacts may not have been sufficiently considered. Indigenous communities may be particularly vulnerable to the impacts of expanded critical minerals mining, as a significant portion of the mineral reserves needed for the U.S. energy transition are located within 35 miles of Native American reservations.

If everything goes right and if a mine is located in the ideal environment (for example, one with ample water and at low risk of flooding), impacts can in theory be localized to the mine site and avoid affecting nearby communities. In addition, mining companies may bring essential services to local communities in the form of health care, access to fresh water and well-paying jobs.

The challenge is that given the footprint of a mining operation, the time period over which mines operate (on the order of decades), and the fact that mines must often be managed in perpetuity, it is difficult to have everything go right. Laws and permitting must be sufficiently protective and enforced; environmental impact studies must be carried out and address all relevant risks; changes in the ore body composition must be noted and addressed quickly in case it shifts toward a significantly higher percentage of a dangerous element; effective management systems must be in place; and there must be no accidents, such as liner failures, air pollution control device breakdowns or wildlife incursions.

As global demand for critical minerals grows, effective regulation and responsible corporate practices must minimize environmental degradation, avoid environmental injustice and address the social risks associated with mining — including providing local communities with a forum to have voice in the process.

How Can the U.S. Responsibly Source Enough Critical Minerals to Meet Climate Goals?

There is widespread agreement that additional mining of critical minerals is necessary in the short- to medium-term to support a clean energy economy. Estimates suggest that more than 300 new mines will be needed globally to meet demand for EV batteries alone.

Responsibly increasing mining in the U.S. to the extent possible, and fostering responsible practices abroad, will help ensure that this additional mining is done under the most rigorous standards available. The Inflation Reduction Act’s critical minerals sourcing requirements directly support both goals by incentivizing domestic production and helping shore up trading relationships with like-minded allies.