The Inflation Reduction Act is the start of the recovery of critical mineral chains

The Inflation Reduction Act (IRA) passed by Congress and signed into law by US President Joe Biden on August 16 promises to dramatically change US energy and foreign policy. The law provides for billions of dollars in tax incentives for renewable energies, provisions supporting offshore oil and gas leasing and other innovations designed to enhance U.S. energy security while fighting climate change.

But an important piece of the law has been largely overlooked. Under the IRA, there is a commitment to increase the US domestic supply of critical minerals – lithium, nickel, manganese and graphite, among others – to provide the materials needed for a vast expansion in electric vehicles (electric vehicles), batteries and renewable energy production infrastructure.

For the first time, US policy directly links the supply of these misunderstood minerals to a massive paradigm shift in the automotive market. As the markets for these materials are diverse, global and largely dominated by China, this offers a rare example of bipartisan concern.

The Inflation Reduction Act (IRA) passed by Congress and signed into law by US President Joe Biden on August 16 promises to dramatically change US energy and foreign policy. The law provides for billions of dollars in tax incentives for renewable energies, provisions supporting offshore oil and gas leasing and other innovations designed to enhance U.S. energy security while fighting climate change.

But an important piece of the law has been largely overlooked. Under the IRA, there is a commitment to increase the US domestic supply of critical minerals – lithium, nickel, manganese and graphite, among others – to provide the materials needed for a vast expansion in electric vehicles (electric vehicles), batteries and renewable energy production infrastructure.

For the first time, US policy directly links the supply of these misunderstood minerals to a massive paradigm shift in the automotive market. As the markets for these materials are diverse, global and largely dominated by China, this offers a rare example of bipartisan concern.

The objective of the policy is threefold. The Biden administration wants to accelerate the energy transition to low-carbon technologies; encourage domestic manufacturing; and improve US energy security, ostensibly by reducing its dependence on foreign supplies of the minerals needed to support the energy transition. For this reason, IRA EV tax credits come with significant warnings— that is, they only apply if the materials used to construct the vehicle come either from the United States or from countries with which the United States has free trade agreements.

This provision exposes the United States to a significant foreign policy challenge. The huge amount of critical minerals needed to fuel the energy transition is staggering, and currently global mineral markets and their associated supply chains are cornered by a small number of countries, with China leading the way. While the 20th century saw battles over access to oil, the 21st century will likely be defined by a fight over critical minerals, especially as the United States views China as a global competitor and strives to limit their dependence on Chinese supplies for the manufacture of electric vehicles and a wide variety of energy and defense technologies.

Critical minerals like oil and gas can be divided into upstream, midstream and downstream sectors. Upstream, or production, is dominated by producers of raw materials. Australia and Chile together produce about 70 percent of global production lithium, a mineral needed to make EV batteries. The Democratic Republic of the Congo contributes around 70% of world production cobaltIndonesia provides about 30 percent of nickeland Chile and Peru dominate copperwith 40% of the world share.

Although China is a considerable producer strategic minerals – sixth for nickel and third for copper – it dominates the midstream refining and advanced downstream manufacturing markets. It didn’t happen overnight. China has made a concerted set of policy and investment decisions at home and abroad over the past decades, mainly to provide cheap finished goods to supply its own booming domestic market. According to a study by the Brookings Institution, China refines 68% of the world’s nickel, 40% of its copper, 59% of its lithium and 73% of its cobalt. More importantly, China has 78% of the world’s electric vehicle battery manufacturing capacity, the bulk of the world’s solar panel production and three-quarters of the world’s lithium-ion battery factories.

The United States, on the other hand, has seen its status as a mineral producer decline. From 27% in 1996, the share of the United States in upstream lithium market fell to just 1% in 2020, with only one operating mine in the Clayton Valley, Nevada. Knowledge and intermediate refining plants are almost non-existent. Downstream capabilities are also lagging: despite massive investment in manufacturing new lithium batteries, the U.S. ability was only 44 gigawatt hours compared to China’s 558 gigawatt hours in 2020.

The United States therefore faces an uphill battle. To meet the requirements set by the IRA, domestic production of critical minerals and electric vehicle components will need to expand significantly. Demand for electric vehicles has increased dramatically, in part due to high oil prices. Electric vehicle registrations have increased 60 percent year-over-year in the first quarter of 2022, and the electric vehicle market is expected to grow from $24 billion in 2020 to $137.43 billion by 2028. Private industry has already answered the call, with 13 new “gigausinesfor the production of lithium-ion batteries which are expected to be completed by 2025.

To achieve energy security, energy transition, and the IRA’s national economic goals, the Biden administration must devote more time and energy to addressing issues around critical minerals. These efforts require dedicated diplomatic efforts, such as those designed under the direction of the U.S. Department of State Energy Resource Governance Initiative began under the Trump administration and the nascent Mineral Security Partnership.

Focusing on five critical areas can help lay the foundations for a dynamic, more resilient and robust set of supply chains, and thus effectively support energy transitions.

First, focus on sustainable mining. Mining practices have improved dramatically over the past few decades. Modern approaches to sustainability have become common practice in mining operations, from water and air pollution techniques to better community engagement. Nevertheless, the industry is still seen as dirty, old fashioned and unsophisticated. The role of mining in supporting clean energy transitions is allowing a new narrative to emerge for the sector. Large companies will contribute by applying advanced technologies while improving emissions monitoring and safety.

Second, make markets transparent and functional. The scale of trade in various critical minerals is very small and opaque compared to larger markets like oil or coal. Markets for critical minerals often exhibit a dominant player or a small number of players, poor price signals and weak governance. This leads to inefficient market signals for investment, impediments that can create huge barriers to production and trade.

Third, think in terms of supply chains, not just rocks. Each of the critical minerals has its own unique supply chain. In the United States, for example, there are now 50 minerals on the list published by the US Geological Survey. Each has a different set of characteristics, geographies, and uses. Additionally, some of those on the list are known as secondary or tertiary minerals – most cobalt is a byproduct of nickel, for example. Issues from mining to chemical processing to advanced manufacturing make it essential to design policies that recognize all stages.

Fourth, use circular economy concepts. Once products reach the end of their life, the materials they contain can often be recycled. Significant economic and technological efforts must be made to raise these rates, which are terribly low in the United States. For example, the recycling amount of lithium-ion batteries is only about 1 to 5 percent.

Fifth, facilitate faster authorization and regulation. As in other areas of industrial policy set out in the IRA, a key to success in the critical mineral space will be to focus on allowing as well as social acceptance. To build an industrial infrastructure in the United States, there is a complicated patchwork of rules and regulations in addition to the need for deep community engagement. In contrast, China has a different set of bureaucratic obstacles but can prioritize infrastructure based on directives from above.

Innovation and diplomacy are important ways to facilitate, if not radically alter, the demand for key materials and the nature of their trade and markets. These innovations also explicitly highlight key features of governance, environment and societal engagement in supply chains. Without this more holistic view of the sector and a recognition of the role that China will continue to play, it is likely to become a significant obstacle to energy transitions. Potential scarcity must be taken into account in the design of new products. The trade-offs, for example, between the use of critical materials and energy efficiency need to be better understood.

The IRA promises a drastic reduction in US carbon emissions and an acceleration of the energy transition away from fossil fuels. The United States needs more wind turbines, solar panels and electric cars. But to make this possible, more mines will be needed.

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