US efforts to decarbonize and de-risk the battery supply chains: Are they fundamentally incompatible? (2024)

This paper looks at the challenges of de-risking U.S. supply chains while also incentivizing decarbonizaton. It asks whether effective emissions reduction-related initiatives are fundamentally incompatible with efforts to limit U.S. dependencies on China. It unpacks this question by examining the Biden administration’s policy on lithium-ion battery (Li-ion battery) supply chains, and looks specifically at how the Inflation Reduction Act (IRA) electric vehicle subsidies under section 30(d) credits are complicated by ‘foreign entity of concern’ (FEOC) restrictions and other qualifying criteria which effectively seek to limit China’s market share.

It argues that mass market electric vehicle (EV) adoption in the United States will depend on the availability of a high volume of consumer choices priced at or below $35,000, which would unlock access to around half of the U.S. new passenger car sales market. Establishing a $7,500 dollar tax credit alongside falling Li-ion battery prices, and increased competition amongst automakers and vehicle lines, all point to strong momentum in meeting the U.S. EV deployment goal and tackling surface transport emission reductions. The supply chain-related conditions placed on that tax credit, however, are likely to be too formidable in cost, complexity, and geopolitics to have the intended impact as the full set of qualifying criteria is finalized and enters into force. Further, the awkward marriage of a sanction-like function (the FEOC restrictions) with tax credits is a questionable vector to advance supply chain resiliency and energy security, given the shifting paradigms driven by energy transition and decarbonization.

Nonetheless, the Department of Energy (DOE) aimed to achieve a delicate balance of the risks of growing dependencies in China’s Li-ion battery industrial capacity while identifying areas where market dependence becomes national security vulnerability. These are valuable, unmistakable signals for the United States to send to Beijing, drawing a distinction between a growing tendency in Washington to characterize Chinese economic activity as nefarious solely by virtue of it being undertaken by China, and China’s ability to actually undermine U.S. interests through its supply chain concentration. Original equipment manufacturers are increasingly caught in the middle of these geopolitical dynamics, and will be expected to make very substantial changes to sourcing and supply chain configurations along extremely limited timelines. However, those changes will impose significant costs and technical challenges, and in some cases may not be feasible during the effective period of the tax credit. The outcome of the 2024 presidential election promises to complicate matters further.

By: Brad Simmons

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