The chief issue with LIB production is not supply shortages; rather, global production capacity vastly outmatches demand. As the United States intensifies its initiatives to bring back the LIB supply chain within its borders, it is becoming apparent that demand shortages may pose significant challenges for nations aiming to develop their homegrown industry.
According to BloombergNEF, demand for lithium-ion batteries in EVs and stationary storage reached approximately 950 GWh last year. However, global manufacturing capacity exceeded this by more than double, reaching close to 2,600 GWh. China’s battery production in 2023 alone matched worldwide demand. The United States is not the sole player aiming to expand its slice of the global battery market through tax incentives and domestic content requirements. Canada is keeping pace with U.S. incentives, and European countries, India, and other regions are also providing subsidies to bolster their battery sectors. This indicates that the oversupply situation is poised to worsen before any signs of improvement emerge.
Barriers to Growing Demand
The United States must overcome significant foreign trade and domestic economic challenges related to increasing demand for LIB-powered goods. In the case of EVs, there is an evident alternative—internal combustion engines, which still present several advantages. Chief among these advantages is purchase cost. EVs are still more expensive than their gasoline-powered counterparts, primarily due to expensive battery technology. The large charge required to provide a minimum range for most owners requires a costly manufacturing process.
In addition, there are remaining issues with charger incompatibility that work to dampen consumer demand: the type of plug, power requirements, and app can all vary significantly, sometimes preventing EV owners from effectively using available infrastructure. Related to this problem is the relative lack of charging infrastructure. Today, most electric car and van charging relies on private chargers, mainly at the driver’s residence. Public and workplace charging stations are increasingly valuable for those living in multiple-unit habitations where charger availability could be limited. The stock of workplace chargers is expected to increase about eightfold by 2030 across the scenarios, while the number of public chargers is forecasted to increase around fivefold.
The 30D Tax Credit
The Inflation Reduction Act (IRA) 30D tax credit aims to address the potential demand shortages caused, in part, by the issues mentioned. The credit, which incentivizes consumers to acquire EVs by providing a tax break of up to $7,500, and the guardrails around it have become emblematic of the anchoring of the current U.S. climate approach in nearshoring and reshoring through industrial policy. To be eligible for the credit, vehicles must undergo final assembly in North America. In addition, to receive half of the credit ($3,750), at least half of the battery components must be manufactured or assembled in North America. That requirement increased to 60 percent in 2024 and will gradually increase to 100 percent by 2029. To qualify for the other half of the credit ($3,750), the battery must contain a certain percentage of critical minerals produced in the United States or a country with which the United States has a free trade agreement. That percentage requirement likewise increased to 50 percent in 2024 and will reach 80 percent by 2029.
The percentage-based content requirements required more detailed final rulemaking. After considering public feedback in response to the proposed rules, the U.S. Department of the Treasury released final guidance regarding taxpayer and vehicle eligibility for the new and previously owned clean vehicle credit, as well as critical minerals, battery components requirements, and Foreign Entity of Concern (FEOC) restrictions.
The rules are part of a compliance review process of critical mineral and battery input requirements, along with FEOC restrictions, which started in the summer of 2024. The Internal Revenue Service conducts the up-front review, assisted by the U.S. Department of Energy. In addition, the Department of the Treasury has announced a novel “Traced Qualifying Value Test,” which requires manufacturers to perform a thorough supply chain review to assess the value-added percentage for extraction, processing, and recycling, which will be key in determining the value of the qualifying critical minerals.
The FEOC restriction final rules make the accounting requirements for relevant critical minerals contained in a battery cell permanent, though they also note that some materials are untraceable. The guidance has generally remained the way it was originally proposed in late 2023: an EV containing battery components manufactured or assembled by an FEOC—defined as an entity that is “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation” (China, Russia, Iran, or North Korea)—does not qualify. This definition includes entities that are “headquartered, incorporated or performing relevant activities in a covered nation, if 25 percent or more of its voting rights, board seats or equity interest are held by the government of a covered nation, or if the entity is effectively controlled by a[n] FEOC through a license or contract with that FEOC.”
The credit’s strict requirements slash the number of EV models eligible for the tax incentives. In 2023, Stanford University’s Institute for Economic Policy Research determined that only 11 EV models qualified for the credit under the IRA. Even after the law’s provisions were modified in January 2023, the total number of eligible EVs remained constant at 11.
As the first report of this series notes, the leasing loophole—which presents a gap in the 30D tax credit’s friendshoring and household income requirements—has allowed consumption of EVs to continue to rise despite the IRA’s restrictive intent. Nevertheless, the guardrails around EV restrictions are undoubtedly curtailing their deployment, placing critical impediments on a key technology to achieve U.S. decarbonization goals. By curbing demand through limits around vehicle choices, guardrails around 30D prioritize de-risking from Chinese inputs and spurring domestic manufacturing over accelerating EV adoption.
In addition, the guardrails around the IRA tax credits—including 30D—may well violate U.S. commitments to multilateral trade rules. World Trade Organization (WTO) rules are designed to ensure a level playing field of competition in the global marketplace. The act’s use of local content requirements—which make tax credits for EV and battery manufacturing accessible to purchasers of cars only if significant portions of the items are obtained or manufactured within the United States or its free trade agreement allies—have the potential to distort the global green technology market. China has already notified the WTO of its intent to invoke the organization’s dispute settlement procedures regarding the impact of the IRA tax incentives; despite the country’s trade rules violations, it may prevail in this dispute.
Trade and Economic Challenges against Setting Up a Viable Domestic Landscape
U.S. prioritization of reshoring over friendshoring is unlikely to be effective, as the current domestic landscape is not favorable to rapid LIB deployment; it will therefore hinder the country’s ability to lessen dependence on China. In addition, because domestic conditions in the United States are not yet capable of adequately taking on a reshoring agenda, the U.S. green transition will likely be hobbled. As the United States imposes additional trade barriers to promote domestic production, it is increasingly oversaturating a homegrown market that cannot achieve decarbonization goals or significantly scale up manufacturing.
Trade Barriers
Gaps in U.S. trade policy also drive up the costs of LIB production and deployment in the United States, as well as the manufacturing and deployment costs of key LIB-powered products—worsening issues related to demand. In addition to lowering content requirements around state-led investments, the United States can improve access to this key decarbonization technology by pursuing free trade policies. The benefits of lower barriers in a broad swath of goods would support LIB production. For instance, the levying of high and broad tariffs on imports and exports has disrupted the chemical value chain and the industries that rely on it, including green technologies.
