What the Inflation Reduction Act Means for Supply Chains

On August 16, President Biden signed the Inflation Reduction Act (IRA) into law. The expansive legislation promises $369 billion for climate and clean energy policies and also, in part, encourages electric vehicle manufacturers to expand production and sourcing in North America.

“American auto companies along with American labor are committing their treasure and their talent – billions of dollars in investment – to make electric vehicles and battery and electric charging stations all across America,” Biden said at a bill signing event.

The law contains up to $7,500 in tax credits for consumers who purchase electric vehicles (EVs), though the financial incentive only applies when final assembly of the vehicles occurs in North America. Another requirement of the IRA is that the components used in EV batteries must not have been “extracted, processed, or recycled by a foreign entity of concern.” A goal of the Inflation Reduction Act is to promote manufacturing of electric vehicles in the United States.

The tax credit is then split in half based on two further conditions: (1) a percentage of battery metal value must be extracted or processed in the United States or in a partner country with a free trade agreement (FTA), or sourced from material recycled in North America; and (2) a proportion of battery components must be manufactured in North America.

What does that mean for the EV battery supply chain?

EV companies must source at least 50% of their battery components by value in the U.S. or allied countries beginning in 2024, a percentage that increases to 80% after 2026. By 2029, 100% of battery manufacturing must be in North America. This is a mandate for manufacturers of electric vehicles to have more transparent end-to-end supply chains.

The bill also includes a 10% Advanced Manufacturing production tax credit across the breadth of the lithium ion supply chain, which would help ease the cost burdens facing battery manufacturers and automakers. This 10% tax credit begins with the production of critical minerals and extends midstream for cathode and anode materials.

The credits aim to make EVs more affordable, but their greatest impact lies in their requirement that a proportion of the battery minerals in qualifying vehicles must have been extracted or processed in the U.S. or FTA partner countries. EV consumer tax credits will increase producer demand for new sources of battery metals to capitalize on the provision.

In an effort to combat the IRA and its incentives, the European Union (EU) has decided that by 2035 the sale of new internal combustion engines will be banned, and all new cars will be battery-electric. The EU came to a provisional agreement that aims to make batteries for electric vehicles more sustainable, safer, and easier to recycle. From as early as July 2024, manufacturers will have to report their batteries’ entire carbon footprint, from mining to production, and even into recycling.

The consumer demand generated by buyers looking to capitalize on the tax credits offered by the IRA could motivate manufacturers to invest in supply chain transparency to secure alternatively sourced minerals. The intent is to localize the critical minerals supply chain and the components that go into making electric vehicles. 

Mapping your supply chain is the foundation for building a risk management, due diligence, and responsible sourcing program for your company and its stakeholders. To learn more about supply chain mapping and how Sourcemap can help, reach out to our team.