Biden Administration Policies
Tax incentives. Current tax incentives included in recent industrial policy packages—chief among them the IRA—aim to provide a launchpad for domestic manufacturers. They are meant to spur production of multiple goods necessary to the green transition, including the active materials production stage of the lithium-ion battery supply chain.
When it comes to producing electrode materials, such as anodes and cathodes, the IRA’s 45X advanced manufacturing production tax credit (PTC) is a boon for U.S. manufacturers. With eligible materials receiving a credit of 10 percent of the cost of production, the PTC is designed to support development of the active materials production stage of the supply chain. The tax credit applies to both equipment and minerals produced in the United States and sold between December 31, 2022, and December 31, 2032. Further, the produced equipment must be sold to an unrelated party as part of the taxpayer’s trade or business. There is a credit amount phaseout beginning in 2030 for only the manufactured components, but credits for critical minerals will expire without phasing out over time.
However, the effectiveness of this tax credit is somewhat limited as it applies to specific production costs only. It does not cover direct or indirect material costs, nor does it include expenses related to the extraction, production, or acquisition of raw materials. These exclusions limit the overall utility of the credit in boosting domestic production of electrode active materials and instead ensure that it is only an impetus for production for firms at the margins.
Another supply-side incentive the IRA provides is the 48C investment credit, awarded by the Department of Treasury in partnership with the Department of Energy. It awards credits of up to 30 percent of capital investment, provided the relevant project satisfies wage and apprenticeship requirements. This incentive has more regulatory barriers than the 45X credit, as project developers must apply to the Department of Energy and receive a decision from the Internal Revenue Service. In addition, total financing for the investment credit is capped at $10 billion.
The 48C investment credit is geared toward bridging the gap between the required capital expenditures to develop factories in the United States and China. According to Columbia University’s Center on Global Energy Policy, the capital expenditure intensity in the United States averages around $90 million per gigawatt-hour (GWh), about a third higher than the $60 million per GWh capital expenditure required in the PRC. China clearly maintains the dominant position in access to raw materials, processing capabilities, and active materials production. Nevertheless, the investment credit helps enhance U.S. competitiveness. U.S. gigafactory capacity in the pipeline through 2030 has increased by roughly 70 percent, from around 700 GWh in July 2022 (before the IRA) to just over 1.2 TWh in July 2023.
Grants and loans. While the United States is currently not a major player in refining and active material assembly, significant amounts of onshore capacity are expected to come online in the coming years. Spurred by government-backed loans and private investments totaling $1.6 billion, firms such as Our Next Energy are set to begin producing 20 GWh of cathode materials and battery cells in a Michigan plant set to come online in late 2024. Plans for the gigafactory were announced in October 2022, giving it an ambitious timeline of roughly two years between the announcement of additional capacity and that capacity coming online.
The two-to-three-year timeline also applies to gigafactory projects that Redwood Materials, Tesla, and Gotion are currently pursuing. These factories, which will focus on cathode production, anode manufacturing, and lithium refining, respectively, will collectively amount to 200 GWh in capacity once operational.
However, the rollout of these gigafactories is already experiencing some setbacks. Ford announced it would pause development of a 35 GWh plant worth $3.5 billion in Michigan. Delays in battery cell factories coming online arise largely due to shortages in skilled labor, efficiency limitations, and unforeseen price increases for active materials. In recent years, pricing hurdles were driven by a surge in lithium carbonate prices from roughly $6 per kilogram in 2020 to $70 per kilogram in November of 2022. Since cathode active materials represent roughly 50 percent of total manufacturing costs for battery cells, such increases have placed barriers to entry on expanding battery cell manufacturing capacity. Yet in the last two years, these increases have largely reversed, and prices have plummeted back to $14.50 per kilogram. While this value is almost three times higher than in 2020, the effect of pricing concerns on gigafactory rollout is far more modest than it was in 2022.
Additionally, U.S. workers may lack the necessary manufacturing experience, effectively ensuring that even when plants and gigafactories come online, they will not produce active materials with high efficiency. Gigafactory construction requires a set of competencies related to “equipment maintenance [and] troubleshooting production” not widely available within the U.S. workforce. Additionally, once factories have begun producing materials and finished cells, they also face assembly line staff shortages, as the U.S. workforce is largely trained in internal combustion engine manufacturing rather than in battery production. Ohio, for instance, has 58,000 open roles related to EV manufacturing. Aside from competencies, another cause of this labor shortage is the relatively low compensation levels compared to the broader automotive sector. The starting wage at a GM battery cell plant in Ohio is $16.50 an hour, while the average assembly line worker at a United Auto Workers plant makes roughly $28 an hour. While lower wages serve as a hedge against active material price increases, they also ensure labor shortages going forward.
Initial production yields for battery cell lines among new entrants to the sector in the United States are often as low as 50 percent. As shown by the Center on Global Energy Policy, projections through 2032 clearly show North America will have the gigafactories to satisfy cell demand but will not have the local supply of cathodes and anodes to construct those cells.
The Biden administration’s EPA sees lithium-ion battery recycling and repurposing as a means of domesticating this lithium-ion battery supply chain, particularly since U.S. lithium reserves make up just 4 percent of the world total. In the near term, the EPA seeks to take the following steps to encourage these processes:
- Foster the design of battery packs for ease of second use and recycling.
- Establish successful methods for collecting, sorting, transporting, and processing recycled lithium-ion battery materials, with a focus on reducing costs.
- Increase recovery rates of key materials such as cobalt, lithium, nickel, and graphite.
- Develop processing technologies to reintroduce these materials into the supply chain.
- Develop methodologies for proper sorting, testing, and balancing for second-use applications.
- Establish federal recycling policies to promote collection, reuse, and recycling of lithium-ion batteries.
The IIJA grant disbursement notes that the focus of the funding is primarily on lithium processing, with nickel and graphite processors also receiving some grant money. The IIJA guidebook provides a comprehensive overview of all IIJA programs and grants, including several focused on active materials production and battery recycling:
- Battery Manufacturing and Recycling Grants ($3 billion total)
- Battery and Critical Mineral Recycling ($125 million total)
- Lithium-Ion Recycling Prize ($10 million total)
- Battery Recycling Best Practices ($10 million total)
- Electric Drive Vehicle Battery Recycling and Second Life Applications ($200 million total)
The U.S. Department of Energy also announced $192 million in funding in June 2023 to expand battery recycling research and development, calling the investments “essential” to the advancement of a domestic supply chain of critical materials for the energy transition.
However, the Biden administration’s investments in recycling capabilities may face similar roadblocks as the active materials production hubs. In October 2023, Li-Cycle Holdings Corp., which was set to receive significant backing from the Biden administration, saw its share price cut by almost 50 percent after announcing it would pause construction on a lithium-ion battery recycling plant. Li-Cycle assessed that it was facing escalating costs in attempting to operationalize its fabrication plant.
While battery recycling is a relatively new market in North America, more mature firms abroad are also encountering issues. In the PRC, for instance, there are too many recyclers and not enough materials to go around, making many businesses’ operations currently untenable. It may take several years for recycling to become a viable industry in the United States: there are still relatively few EVs on the road, and other electronics that contain lithium-ion batteries are challenging to collect and too few in number to meet the needs of budding lithium-ion battery demand. Thus, the sector may encounter losses before becoming sustainable.
Congressional Considerations
A report by the House Select Committee on Strategic Competition between the United States and the Chinese Communist Party, released in December 2023, offers some insight into the bipartisan ad hoc committee’s thinking on diversifying the lithium-ion battery supply chain. The report’s recommendations may be split into two categories: those that pertain to critical minerals and those that pertain to battery manufacturing.
When it comes to critical minerals, the committee’s report recommends enacting legislation to “encourage sectoral agreements with key trading partners and allies with strong rules of origin and high standards on critical minerals,” in addition to sourcing critical minerals and materials domestically and from friendly nations. This demonstrated openness to ensuring U.S. partners and allies become a stronger part of the country’s critical minerals supply chain, instead of solely focusing on onshoring, could enable lithium-ion battery manufacturers to scale up their production capabilities.
However, the report recommends incentives with domestic content requirement guardrails that partially defeat the friendshoring purpose of the overarching recommendations. Limiting the sourcing of necessary minerals and materials to U.S. production in part negates the diversification objectives in these tax credits. The enhanced recycling measures the report recommends—such as requiring the Defense Logistics Agency Strategic Material Recovery and Reuse Program to pilot a recovery program to extract strategic and critical materials from end-of-life government hard disk drives—would likely not make up, in time or amount, for the production capabilities of U.S. partners.
The report’s recommendations about batteries pose a similar issue, as its proposals largely emphasize the need to “encourage a domestic battery recycling industry.” Ramping up recycling efforts could help the U.S. lithium-ion battery industry become self-sufficient as more batteries are retired, while limiting incentives to domestic efforts would curtail U.S. access to additional lithium-ion battery materials. In addition, recycling is a technically challenging, labor-intensive process. Given the difficulties, it would not wholly replace production of original active materials.
Instead, coordinating the ramping up of recycling operations with economic partners and allies who are also aiming to enhance their capabilities in this sector would enable more effective diversification results. U.S. efforts are not occurring in isolation: the EU lithium-ion battery recycling market is set to increase to 130 GWh, or 700 kilotons, by 2030. In addition, the EU market is set to expand again, threefold, by 2040 to 2,100 kilotons. Japan and South Korea are also aiming to expand their battery recycling industries. For instance, key Japanese firms have collaborated with the New Energy and Industrial Technology Development Organization, a state-owned energy research agency, to develop technology that increases their capacity to extract recyclable materials from used batteries. This initiative is set to enable a recycling ratio of 70 percent for lithium, 95 percent for nickel, and 95 percent for cobalt by 2030. South Korea is also investing some 40 trillion won ($30 billion) to facilitate recycling efforts and second-life applications for used battery components. A U.S. strategy that prioritizes working with partners who are also investing in their own capabilities would improve the likelihood of successful diversification away from China and an effective transition to renewables.
Conclusion
The second stage of the lithium-ion battery supply chain examined in this paper—active materials production destined for cathodes and anodes—poses challenges to current onshoring policies. It demands physical capital and labor to accomplish technical work. Active materials production involves several steps—namely, mixing, coating, calendaring, slitting, and electrode making—in addition to producing the separator and electrolyte solution key to the functioning of a lithium-ion battery.
As noted, China largely dominates this portion of the lithium battery supply chain, followed by South Korea and Japan. China’s dominance is strengthened by its sway over the production of inputs higher up the supply chain, as well as its strong influence over the global prices of key commodities. The United States is also limited by higher costs in penetrating the market, given its relative dearth of operational manufacturing capabilities and challenges in obtaining workers, which stem both from more robust labor standards and the lack of a sufficiently trained workforce.
Policies that emphasize onshoring capabilities in the active materials production stage of the lithium-ion battery supply chain are already confronted with the limitations of U.S. capacity. Projects launched by grants and loans under the IIJA and IRA are facing various hurdles, such as inadequacies in the domestic labor market as well as difficulties in making a nascent recycling industry profitable. These barriers are in part self-imposed by restrictions around domestic content requirements.
