Understanding the Inflation Reduction Act (IRA)
The Inflation Reduction Act (IRA) is the hallmark legislation of the Biden Administration, and it is fueling an investment boom in the United States by incentivizing consumers and businesses to invest in clean energy technologies. On December 1st, the U.S. Treasury Department and Internal Revenue Services (IRS) released proposed guidance on the clean vehicle provisions of the Inflation Reduction Act (IRA). The announcement was headlined by a staggering $100 billion of private-sector investment announced since its passage to accelerate the U.S. clean vehicle and battery supply chain. BloombergNEF, Bloomberg’s New Energy Finance research team, analyzed the breakdown of the $100 billion and found that about 75% has been committed to battery manufacturing, just over 10% for electric vehicle manufacturing, about 10% for battery component production, and the remaining 5% for battery recycling and the sourcing of raw materials (1). Condor Capital is focused on identifying investment trends like those unfolding following the passage of the Inflation Reduction Act.
Impact on the Electric Vehicle Industry
“The Inflation Reduction Act has unleashed an investment and manufacturing boom in the United States, and since President Biden enacted the law, ecosystems have developed in communities nationwide to onshore the clean vehicle supply chain,” said Secretary of Treasury Janet L. Yellen. “The Inflation Reduction Act’s clean vehicle tax credit saves consumers up to $7,500 on a new clean vehicle and hundreds of dollars per year on gas while creating American manufacturing jobs and strengthening our energy security.” (2) The IRA outlines the gradual changes Electric Vehicle manufacturers must make to produce EVs eligible for the $7,500 credit. This results in a ripple of direct investment announcements from companies planning to avoid the IRA’s foreign entity of concern (FEOC requirements). The “Buy America” component of the IRA has ushered in an era of investment in the United States to bolster Energy Security and Climate Change initiatives.
President Joe Biden signed the Inflation Reduction Act (IRA) on August 16, 2022, containing $369 billion earmarked for Energy Security and Climate Change programs over the next ten years (3). The IRA supports Energy Security through the extension and expansion of existing renewable energy credits, the introduction of new tax credits to promote investment in new clean energy technologies, the expansion of existing production tax credits and tax credits to support business investment in energy storage technologies (clean vehicles and their supply chain, charging stations, and clean fuels). The IRA also provides funding for climate change initiatives surrounding emission reduction strategies in multiple sectors while incentivizing consumers to buy energy-efficient electric appliances, clean vehicles, and rooftop solar generators.
Challenges and Opportunities for EV Manufacturers
The stricter requirements may be a short-term negative for Electric Vehicle demand if a manufacturer is not ready to comply with the new thresholds. Still, the over $70 billion of announced commitments to onshoring battery manufacturing in North America since the passing of the IRA is an example of how businesses have made private investment decisions to maintain eligibility for the tax credits. While companies invest in infrastructure and manufacturing capacity to be eligible for credits and incentives in the IRA and infrastructure law, it will take time to rebuild supply chains quickly enough. Adding to auto-manufacturers difficulties, the Biden administration recently unveiled plans to include China as a “Foreign Entity of Concern” (FEOC). This means that starting in 2025, no critical minerals in batteries can be extracted, processed, or recycled by an FEOC and be eligible for tax credits or other incentives in the IRA or Infrastructure bill. China’s inclusion in this list increases the urgency of building a domestic mine-to-battery supply chain. China currently accounts for nearly two-thirds of global lithium processing capacity, 95% of manganese capacity, and over 75% of cobalt capacity. While excluding China from the supply chain for tax-credit-eligible vehicles will spur investment into supply chains away from China, in the short term, it may reduce the number of vehicles eligible for tax credits, further softening demand for EVs.
Looking Ahead: The Future of Electric Vehicles
The Inflation Reduction Act has played a vital role in catalyzing an investment boom focused on clean energy technologies and the electric vehicle supply chain. The recent release of proposed guidance by the U.S. Treasury Department and IRS underscores the significance of this legislation, with over $100 billion in private-sector investments committed after the act’s passage. While driving investment in manufacturing and supply chains, the difficulty of meeting eligibility guidelines in the near-term presents another headwind for EV adoption.
Written by: Matthew Goldman
Sources
- Reports of an Electric Vehicle Slowdown Have Been Greatly Exaggerated – Bloomberg
- Treasury Releases Proposed Guidance to Continue U.S. Manufacturing Boom in Batteries and Clean Vehicles, Strengthen Energy Security | U.S. Department of the Treasury
- Inflation Reduction Act One Page Summary (senate.gov)
- EV Tax Credit 2023-2024: How It Works, What Qualifies – NerdWallet
