The Inflation Reduction Act Is the Start of Reclaiming Critical Mineral Chains

The Inflation Reduction Act (IRA) passed by Congress and signed into law by U.S. President Joe Biden on Aug. 16 promises to shake up U.S. energy and foreign policy in dramatic ways. The law provides billions of dollars in tax incentives for renewable energy, provisions supporting offshore oil and gas leasing, and other innovations designed to buttress U.S. energy security while also addressing climate change.

But one important component of the act has been largely overlooked. Built within the IRA is a commitment to increasing the domestic U.S. supply of critical minerals—lithium, nickel, manganese, and graphite, among others—to provide the materials necessary for a vast expansion in electric vehicles (EVs), batteries, and renewable power production infrastructure.

For the first time, U.S. policy is directly tying the supply of these little-understood minerals to a massive paradigm shift in the automobile market. As the markets for these materials are diverse, global, and dominated largely by China, this offers a rare instance of bipartisan concern.

The purpose of the policy is threefold. The Biden administration wants to accelerate the energy transition to low carbon technologies; encourage domestic manufacturing; and improve U.S. energy security, ostensibly by reducing its dependence on foreign supplies of the minerals needed to support the energy transition. For that reason, the IRA’s EV tax credits come with important caveats—namely, they only apply if the materials used to construct the vehicle come from either the United States or nations the United States has free trade agreements with.

That provision tees up the United States for a significant foreign-policy challenge. The sheer amount of critical minerals necessary to fuel the energy transition is staggering, and currently, the global minerals markets and their associated supply chains are cornered by a small number of countries—with China near the top. Where the 20th century featured battles over access to oil, the 21st century will likely be defined by a struggle over critical minerals, particularly as the United States views China as a global competitor and strives to limit its reliance on Chinese supplies for EV manufacturing and a wide variety of energy and defense technologies.

Critical minerals like oil and gas can be broken into upstream, midstream, and downstream sectors. Upstream, or production, is dominated by raw material producers. Australia and Chile together produce around 70 percent of the world’s lithium, a mineral needed to manufacture EV batteries. The Democratic Republic of the Congo contributes around 70 percent of global cobalt, Indonesia provides around 30 percent of nickel, and Chile and Peru dominate copper, with 40 percent of the global share.

Although China is a considerable producer of strategic minerals—sixth-largest for nickel and third-largest for copper—it dominates the midstream refining and downstream advanced manufacturing markets. This did not happen overnight. China made a concerted set of policy and investment decisions in the country and abroad over the last few decades, primarily to provide cheap finished products to supply its own booming domestic market. According to a study by the Brookings Institution, China refines 68 percent of the world’s nickel, 40 percent of its copper, 59 percent of its lithium, and 73 percent of its cobalt. More importantly, China holds 78 percent of the world’s manufacturing capacity for EV batteries, the bulk of the world’s production of solar panels, and three-quarters of the world’s lithium-ion battery factories.

The United States, in contrast, has seen its stature as a minerals-producer decline. From 27 percent in 1996, the United States’ share of the upstream lithium market fell to only 1 percent in 2020, with only a single mine in Clayton Valley, Nevada, in operation. Midstream refining knowledge and plants are nearly nonexistent. Downstream capabilities are also lagging: Despite considerable investment in new lithium battery manufacturing, the United States’ capacity was only 44 gigawatt hours compared to China’s 558 gigawatt hours in 2020.

The United States thus faces an uphill battle. To meet the requirements set out by the IRA, domestic production of critical minerals and EV components will have to expand tremendously. Demand for EVs has risen significantly, driven in part by high oil prices. Registrations for EVs rose 60 percent year-on-year in the first quarter of 2022, and the market for EVs is expected to rise from $24 billion in 2020 to $137.43 billion by 2028. Private industry has already answered the call, with 13 new “gigafactories” for the production of lithium-ion batteries planned for completion by 2025.

To achieve the energy security, energy transition, and domestic economic goals of the IRA, the Biden administration needs to put more time and energy into resolving the questions around critical minerals. Those efforts require dedicated diplomatic efforts, such as those conceived of under the U.S. State Department’s Energy Resource Governance Initiative started under the Trump administration and the nascent Minerals Security Partnership.

Focusing on five essential areas can help provide the basis for a vibrant, more resilient, and more robust set of supply chains—and thus support energy transitions effectively.

First, focus on sustainable mining. Mining practices have improved dramatically over the last 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, outmoded, and unsophisticated. The role of mining in supporting clean energy transitions allows for a new narrative to emerge for the sector. Large companies will assist this by applying cutting-edge technologies while improving emissions monitoring and safety.

Second, make markets transparent and functional. The scale of trade for various critical minerals is very small and opaque in comparison to larger markets like oil or coal. Critical minerals markets often feature one dominant or a small number of players, poor price signals, and weak governance. This leads to inefficient market signals for investment, obstacles that can cause huge roadblocks 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, as an example, there are now 50 minerals on the list put out by the U.S. 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 chemicals processing through advanced manufacturing, make it essential to design policies that recognize all the stages.

Fourth, employ circular economy concepts. Once products reach the end of their life span, the materials that they contain can often be recycled. Significant economic and technological effort needs to be put into raising these rates, which are terribly low in the United States. As an example, the amount of recycling of lithium-ion batteries is only around 1 to 5 percent.

Fifth, facilitate faster permitting and regulation. Like other areas of industrial policy laid out in the IRA, a key to success in the critical mineral space will be a focus on permitting as well as social acceptance. To build any 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 hurdles but can prioritize infrastructure from directives issued from the top.

Innovation and diplomacy are important means to ease or even radically change demand for key materials and the nature of their trade and markets. These innovations also explicitly highlight the key features of governance, environment, and societal engagement across supply chains. Without this more holistic view of the sector and an acknowledgement of the role China will continue to play, it is likely to become a significant barrier to energy transitions. Potential scarcity should be considered in new product designs. The trade-offs, for example, between critical materials use and energy efficiency need to be understood better.

The IRA promises a drastic reduction in U.S. 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 that possible, it will need more mines.