Hitting the Target: How Can America Reach its EV Goals?
When the Biden administration announced its goal of 50% electric vehicle sales by 2030, it did so not as simply an aspirational target, but also as a reflection of underlying trends in the auto industry. Although EV penetration is still relatively limited here in the US, we are seeing rapid growth, with a jump from 5% of all vehicle sales in 2021 to over 15% in 2022. And the future can be seen in countries such as Norway and Iceland where EVs constitute 86% and 72% respectively of all vehicle sales. With a majority of the world’s major car makers announcing that they plan to go fully electric between 2030 and 2040, a global race has begun to secure access to the minerals, technology, human capital, and manufacturing capacity needed to affect that transition.
The United States has seen a number of impressive policy advances to prepare for the EV revolution, not the least of which is the recent passage of the Inflation Reduction Act (IRA) of 2022, alongside efforts to improve international coordination. Private industry is responding to these targets too, with major investments announced in new EV manufacturing as well as new battery factories.
However, significant policy challenges remain. Securing the supply chain for the massive amounts of critical minerals such as lithium, nickel, cobalt, manganese, and rare earth elements, will require both massive investment from the private sector and efforts by authorities here in the United States and overseas to facilitate new extraction and processing facilities. If battery factories do not have access to the materials and parts they require, the entire EV supply chain would be halted, with disastrous effects for the auto industry and the broader US economy. The critical raw material inputs needed for EV batteries pose the most vulnerable link in the EV supply chain and their deficit threatens the revolution in automobile manufacturing.
Wood Mackenzie, a leading research and consultancy firm for energy markets, argues that US $1.7 trillion must be invested in new battery metals production by 2035, a number of current trends lag far behind. It contrasts this number with the less than $600 billion invested in these sectors in the past 15 years, a lackluster trend which appears little changed of recent.
To make matters worse, on average it takes over twice as long, more than ten years, to open a new mine as opposed to a battery factory. So, trends highlighting a discrepancy in mineral supply to battery factories coming online only get worse as more factories are opened while mines lag behind in a longer queue.
Lithium is the most obvious metal where the supply chain is strained. Though abundant around the world, lithium extraction has remained relatively underdeveloped and highly concentrated in a small number of countries until recently. However, according to Albert Li of Benchmark Minerals Intelligence, with skyrocketing demand expected from the EV revolution, it is likely that we will need between 59-75 new lithium projects around the world just to satisfy the demand that we expect to come from electrification of the vehicle fleet over the next decade. McKinsey has predicted that under their base case scenario, demand will grow at an annual rate of 25% until 2030, which with compounding means a growth from 0.54 metric tons of lithium in 2021 to 3.3 million metric tons by the end of the decade. Of course, if those new mines are brought into operation, we will also need to build the processing and refining plants to turn the raw lithium carbonate into battery grade lithium. Industry experts predict nickel demand will grow by 44% over 2022 levels, again driven by EV production, and copper is expected to grow by 20% over the same period. Demand for cobalt is expected to double over 2021 levels by 2030. Benchmark also notes that this rising demand is causing a major adjustment in the pricing model for batteries: in 2015 only 40% of the cost of a lithium-ion battery came from raw materials; by 2022 it was 70-80%.
While we are seeing impressive growth in the production of each of these minerals, extractive projects and more importantly processing facilities remain highly concentrated in a small number of countries. As The Mosaic Approach argued, the United States and other major consumer countries have fallen far behind China in securing access to the critical minerals they need for electrification and energy storage. A recent Benchmark Minerals Intelligence article highlighted that China dominates critical minerals refining and processing, responsible for the processing of 58% of lithium, 75% of cobalt, 69% of nickel sulfate, 100% of spherical graphite and 69% of synthetic graphite. For rare earths, China also has a stranglehold on the market, controlling 80% of rare earths refining.
Existing efforts to address the deficit
Presidential Determination for Critical Materials in Large-Capacity Batteries
In March 2022, President Biden signed a determination authorizing the use of Defense Production Act (DPA) Title III authorities to strengthen the supply chain for large capacity batteries. The determination specifically mentioned (but was not restricted to) lithium, nickel, cobalt, graphite, and manganese. The explicit connection to national security made in the determination is significant and is seen by industry and policy makers alike as an indication of the priority being given to this issue now in Washington. Although the funds being appropriated to support the DPA in this regard only total around $500 million, the impact may be significant in terms of:
- feasibility studies for mining and processing projects;
- by-product and co-product production at existing facilities; and,
- modernization of mining, beneficiation, and value-added processing with a focus on productivity, sustainability, and safety.
Although only a proverbial “drop in the bucket” of the total financing needed for critical minerals development in the US, this “seed capital” will further incentivize private investment and will encourage innovation and development of both green and brown field projects.
The 2022 Inflation Reduction Act (IRA)
The long-awaited Inflation Reduction Act represents a major step forward in the nation’s efforts to promote clean energy technologies in the automotive industry and it “....is perhaps the most significant legislation to accelerate transportation electrification in U.S. history.” Perhaps the most widely recognized provision of this legislation is the extension of the EV tax credit of $7,500 to 2032 (for consumers who earn less than $150,000 individually or $300,000 as a family). This tax credit is broken down into two main credit components: $3,750 credit for batteries constructed with materials mined in the US and/or countries with which the US has a free trade agreement or materials recycled within North America. The second $3,750 credit is for vehicles with batteries manufactured or assembled in North America. The percentage of the value of components for both types of credit will begin increasing in 2024. Of note, to be eligible for the tax credit, no portion of the material can be extracted and/or processed by countries of concern (such as Russia or China). This stipulation will come into effect in 2024 for batteries and in 2025 for critical minerals. Provisions for new manufacturer’s suggested retail price (MSRP) and income caps will apply starting in 2023. The IRA also added another $500M to the DPA funds available for critical mineral projects.
IRA EV Tax Credits
The legislation will eliminate prior restrictions for companies that sold less than 200,000 EVs, thus permitting Tesla, GM, Toyota, and other large-scale producers to benefit. The IRA also includes tax credits for fuel cell vehicles and extends the federal tax credit for charging equipment. Through 2032, the tax credit remains at 30% and up to $1,000 for individuals uses and a 6% tax credit of up to $100,000 for per unit for commercial purposes. The legislation does stipulate that the equipment must be in non-urban and/or low-income areas to qualify for the commercial credit.
In an unprecedented move, used EVs will also be eligible for tax credits. The legislation stipulates a $4,000 credit (or 30% of the sales price) for used EVs weighing less than 14,000 lbs., that cost less than $25,000, and are less than two years old. Additionally, the IRA establishes a 30% tax for EV charging and alternative fuels, while also increasing the maximum use of the credit to $100,000, up from $30,000. To encourage reshoring and nearshoring of the battery supply chain, the IRA stipulates a 10% cost credit - meaning a 7% discount for battery cells and a 30% discount on battery packs - all of which is an approximately 35% discount on global battery cell prices. The provisions in the legislation include a significant focus on commercial EVs, including a tax credit of up to 30% of the sales price or the incremental cost of the vehicle for heavy-duty trucks with a weight of 14,000 lbs. or more. For vehicles with a gross vehicle rating of less than 14,000 lbs., the tax credit is capped at $7,500 and for vehicles surpassing that weight threshold, the tax credit is capped at $40,000. Unlike the light-duty EV credit, the commercial EV credit does not stipulate battery or mineral sourcing requirements. Included in the legislation are funding and provisions for companies, institutions, and organizations to transition to clean energy transportation with a targeted focus on supporting infrastructure, including $3 billion to electrify the USPS fleet, $1 billion to states, tribes, and municipalities to replace class 6 and 7 heavy-duty vehicles, $2 billion to convert existing production lines for the manufacturing of EVs, $3 billion in the form of grants for zero-emission technology at ports, and approximately $20 billion in loans for the automotive industry to construct clean energy facilities in the US. In May of 2023, the U.S. Treasury will begin accepting applications for tax credits for advanced energy manufacturing and decarbonization projects worth $4 billion in total. Eligible projects include “… capture or sequester carbon dioxide, produce hydrogen with zero- or low-emission energy, produce renewable biofuels and battery electric vehicles as well as critical materials for those vehicles and charging infrastructure.” $1.6 billion of the funds will be allocated to communities suffering from closures of coal mines and/or coal-fired plants. The legislation also includes an advanced manufacturing tax credit (Section 45X) which offers tax credits to manufacturers of wind, solar, and battery project components, including battery cells, inverters, PV wafers, etc. It’s important to note, however, that without an adequate supply of critical minerals, the EV subsidies, which make up the core of the IRA, will go unutilized and may eventually minimize the impact of the legislation.
The allowance for North American produced, processed and recycled materials and batteries in the IRA is a major step forward, providing a strong incentive for new investment in mining, processing and recycling here in the region. We expect that there will be a surge in such projects, along with new battery factories. As noted by The Atlantic, the IRA may prove to be a market mover for the “climate economy,” quoting a Credit Suisse report that emphasizes the opportunities for companies that are looking to capitalize on emissions reductions and renewable energies. Furthermore, as more materials enter the system with increased EV sales, recycling will become increasingly attractive. There are significant opportunities here for both Canada and Mexico, depending on the availability of clean energy sources and a conducive investment environment.
While the IRA creates an impressive set of incentives for companies to transition to a reduced carbon model, the overall effect will be one of increased demand for EVs, further exacerbating the existing challenges of supply for battery minerals.
The Mineral Security Partnership
In July of 2022 the State Department announced the creation of the Mineral Security Partnership (MSP), an international effort to coordinate both producers and consumers of critical minerals. This initiative unites major partners and allies of the United States, including Australia, Canada, Finland, France, Germany, Japan, the Republic of Korea, Sweden, the United Kingdom, the United States, and the European Commission, to work together on the critical minerals supply chain. The participation of major minerals producers such as Australia and Canada is, of course, significant. But the presence of important auto manufacturers such as Japan, South Korea, Sweden, France, and Germany also points to the direct connection with the EV industry. According to the State Department, the “goal of the MSP is to ensure that critical minerals are produced, processed, and recycled in a manner that supports the ability of countries to realize the full economic development benefit of their geological endowments.” It also provides a strategic geoeconomic response to China’s dominance of the EV battery and critical minerals sector.
Why this matters
There is a lot riding on the success of these efforts and targets. Apart from the obvious impact on carbon emissions and air quality, there are significant implications for US employment and international competitiveness. In the sections below we examine these two dimensions.
The technological complexity of electric vehicles necessitates input from and the involvement of various disciplines. From scientific research and design and development (involving chemical, electrical, industrial, materials, and mechanical engineers, software developers, and industrial designers) to manufacturing (involving electrical and electronic equipment assemblers, industrial production managers, and engine and other machine assemblers), EV maintenance, and sales and support, the EV industry has the potential to play a significant role in terms of jobs and economic competitiveness in the US.
The Edison Electric Institute estimates that by 2030, the US will have 22 million electric vehicles on the road. Particularly optimistic estimates foresee the creation of 650,000 additional jobs, those both directly and indirectly related to the EV industry, including supporting infrastructure, such as charging stations. More conservative estimates, such as those from the Economic Policy Institute (EPI), estimate the creation of around 150,000 jobs in the auto industry by 2030 - if the share of battery electric vehicles reaches 50% of domestic auto sales by that same year.
Job growth in recent years has been impressive. According to the Department of Energy, the electric hybrid, plug-in hybrid, and EV industries combined employed 198,000 individuals in 2016 and 242,700 in 2019. In 2020, over 130,000 people were employed in just the EV industry in the US - a year in which sales for EVs grew by 40% compared to the year prior. The majority of EV jobs are located in California, Michigan, and Texas, but recent investments in light, medium, and heavy-duty factories in Tennessee, Colorado, Indiana, Georgia, Ohio, Michigan, and Massachusetts may change the current picture. According to DOE’s 2020 US Energy and Employment Report, electric vehicle-related jobs increased by 26.2% in 2022, adding a total of 21,961 jobs to the industry. Relatedly, hybrid electric vehicle jobs grew by nearly 20% (23,577 new jobs), plug-in hybrid vehicle jobs grew by 30% (14,790 new jobs), and hydrogen fuel cell jobs increased by just over 40% (4,160 new jobs) in 2022, according to the DOE.
It is not just the number of jobs that has attracted attention. The skill sets required in the auto industry are rapidly changing as EV manufacturing demands more software engineers, automation experts and, of course, battery technicians and design experts. The Bureau of Labor Statistics is predicting a major shortage of software engineers (1.2 million) in the next few years. This means that universities and community colleges are having to adapt their curricula and hire new instructors. Auto companies are recruiting from countries with strong engineering higher education systems. As a recent article on NPR’s website noted, “the race is on. Not simply to reach the electric future, but to find the right minds to get there.”
There is little doubt that the US automobile industry has come to be seen as not only a major driver of employment and overall prosperity, but also as a central part of the American identity. In this sense, US auto manufacturing is the iconic industry for the nation. Taking the industry into its new era will not only transform the industry itself but it also has the potential to transform the economy and in turn, US competitiveness.
A large part of that equation is to be found in the technological and research and design dimensions of the EV industry. As companies compete to produce more efficient, safer cars with a longer range that also improve the driving experience for the US motorist, we are seeing impressive technological advances to reduce weight, lower the total amount of key minerals used in battery chemistry, and a greater focus on “smart” vehicles that interact with their environment, whether that be urban or rural, through V2X systems. Though this has less to do with the move to electric vehicles and more to do with overall innovation in the auto sector, it is clear that the new generation of EVs is going to be much more deeply integrated into 5G technologies that connect cars to data flows from their surroundings.
This is where we begin to see the broader implications for the US economy. Most obviously, we are going to need the massive build out of charging infrastructure here in the US, and in the rest of North America, as motorists demand more and faster charging stations to give them greater freedom to drive long distances. This charging infrastructure will involve massive investments in transmission, renewable energy generation, and in training and retraining technicians and specialists for installation, maintenance, and customer service.
The race to improve battery performance is currently focused on three competing systems: lithium-ion, lithium-sodium, and solid-state batteries. We should expect progress in all three approaches, and there is a lot at stake. While China currently dominates the global EV battery industry, with more investment now taking place in America, the US has the opportunity to leapfrog Chinese manufacturers and produce cutting edge technologies that will boost the competitiveness of US manufacturers, open up overseas markets and provide
Where the US does not retain its lead in the EV sector it cedes ground to competitors, particularly China, and EPI estimates that US failure to take meaningful policy-driven action could result in the loss of over 75,000 jobs, driven by overseas production. Bloomberg estimates the number of EV sold in the US to be around 10 million by the year 2040, but the failure to capture this market will push production overseas, with some estimating imports at around $100 billion, just for EV batteries.
For the US EV industry to grow as projected, the US must take tangible and sustainable steps to bolster and further grow its leadership in EV production, such as incentivizing onshore investment, increasing domestic production of drivetrain components, increasing advanced manufacturing capacity, and pursuing and promoting trade agreements with enforceable measures. There must also be a targeted focus on workforce development, job quality, and industry employment. Failure to do so will result in stagnation and in extreme scenarios, a decline in employment in this sector, which will have resounding consequences for the auto industry and US GDP overall - as the US auto sector has historically contributed around 5.5% of the country’s GDP.
An Agenda for Future Action
To create the ecosystem required to hit these ambitious targets in EV manufacturing and sales, and to obtain the huge payoffs in terms of employment and competitiveness, it is clear that a multidimensional approach is needed. As noted in The Mosaic Approach, there is no silver bullet, and while the efforts thus far enacted by the US government and private sector are impressive, significant challenges remain. The Wilson Center proposes dialogue and action agenda on the following issues:
- The Minerals Supply Chain: Intensive efforts must be undertaken here in the US and in partner countries to increase investment in both extractive projects for critical minerals and for their processing. The IRA, DPA and MSP efforts already underway provide important steps in the right direction, but ongoing work from governments and private companies will be needed to ensure that minerals flow to where they are most needed by US industry.
- Battery technologies: Innovation is one of the true strengths of the US economy and of American culture, and the innovation ecosystem in the US is unrivaled. New battery chemistries, and technologies such as solid state will help to mitigate some of the demand for minerals, but much will depend on ongoing investments by the private sector and US government in research and development. In 2022 we have seen a renewed commitment to the innovation ecosystem with the $170 billion included in the CHIPs and Science Act for research and development, including STEM education. This is a hugely important commitment to the future of our innovative capacities, but it must be matched by a similar commitment from the private sector.
- Human capital: Closely connected to advances in battery technologies is the element of human capital development. But the talent deficit goes far beyond just batteries. As noted above, the EV revolution is dramatically changing the skill set required by auto manufacturers, with a heavy emphasis on software engineers and workers skilled at operating automated equipment. In addition, the implications of the expansion of V2X technologies will spread far beyond the auto industry itself.
- Recycling: while battery recycling activities remain relatively small in the US today, the eventual market for second life batteries and for recycled battery metals will be enormous. Fortunately, we have time to build out recycling systems in the US as we wait for EV sales to grow and for batteries to reach the end of their first lives. Recent evidence suggests that the 7-8 years of battery life originally predicted by EV producers is actually much longer: some estimates now put EV battery lifespan at the 10-15 year mark. China is currently a leader in EV battery recycling, but European and US firms, such as Redwood Materials have recently made impressive strides in financing new investments.
- Charging infrastructure: In order to encourage consumer adoption of EV technology, a comprehensive and resilient network of charging points must be in place. Existing coverage varies greatly from state to state and between rural and urban areas. There are also important questions to be answered about the sustainability of the energy source for many charging points. However, the network of service stations provides the opportunity to take advantage of existing infrastructure and moves by companies such as BP to install charging points at their service stations suggests one pathway to rapid charging point buildout.
Addressing climate change is a 21st century challenge, but strategically utilizing EVs in the fight for sustainability is an opportunity with roots that trace back to the mid-20th century during the height of the US auto boom. Yes, EVs will play a key role in decarbonization, but beyond that, the industry has the potential to play an important role in US competitiveness - both economic and geopolitical. The auto industry’s existing contributions to annual GDP plus the potential of the EV industry, particularly in terms of employment - from research and design to manufacturing and sales, for both the vehicles themselves and associated infrastructure - hold significant promise for the US in terms of economic competitiveness. At the same time, US failure to establish a lead in the EV sector presents competitors, like China, with an active opportunity to exert dominance, potentially closing the door for the US to lead the sector for years to come. Hitting the targets of 50% EV auto sales by 2030 and deeper decarbonization within the following decade requires an understanding of the multidimensional nature of the EV supply chain by both government and the private sector, ideally working together.
US dominance of the auto industry in the past highlights capacity and potential, but failure to recognize and integrate lessons learned may rule out a similar future for the EV industry. In order to maximize the chances of success, the United States will need the work internally and in partnership with friends and allies around the world to secure an adequate supply of critical minerals. In addition, government and business must invest in innovative technologies for both the extractive and battery industries to increase efficiency in both mineral production and energy storage. A failure to ensure supply and advance technologies risks hundreds of thousands of jobs and the United States’ competitive advantage. Only by maintaining a collaborative and ambitious approach over the next decade can we hope to achieve the twin goals of building prosperity and minimizing negative impacts on the world’s climate.Strengthening America’s Supply Chains