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Countries face challenge in matching US 'firepower' over green industrial policy


IRA has spurred similar policy talks in Canada, EU

Countries fear being left out of supply chains, investments

Japan, Indonesia looking to ink mineral deals with US

  • Author
  • Camellia Moors and Kip Keen
  • Editor
  • James Bambino
  • Commodity
  • Electric Power Energy Transition Metals
  • Tags
  • Battery Materials Lithium United States

US trading partners will struggle to match the Inflation Reduction Act's economic breadth with their own decarbonization policies, experts told S&P Global Commodity Insights.

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The IRA, which contains nearly $400 billion in energy transition spending, sent shockwaves among US trading partners. The world's largest economy throwing its vast financial heft behind the renewable energy ecosystem will have profound implications for minerals supply chains, such as critical minerals sourcing requirements for electric vehicles.

The multiplier effects of the IRA will exceed the initial taxpayer investment. For example, analysts at Credit Suisse have pegged public and private investment related to the IRA at $1.7 trillion over the next decade.

The law has spurred other countries to accelerate the rollout of their own energy transition strategies to keep some battery and renewable power manufacturing within their own borders and lessen dependence on China, which has a dominant position in energy transition supply chains.

"The challenge is: No one's going to be able to match the Inflation Reduction Act in terms of firepower," said Colin Hamilton, managing director of commodities research at BMO Capital.

Muscling up

The US didn't lob the IRA into a policy vacuum. For years, countries have been designing policies to grow energy transition industries, and bolster extraction and processing of materials to counter China's industrial and materials-processing dominance. But the IRA catalyzed policymakers to rethink and speed up green industrial strategies in response, experts told S&P Global.

Among these, Canada directly underscored the IRA as an impetus for new policies the country launched in its March 28 federal budget, including a 30% tax credit aimed at energy transition manufacturing with a focus on critical minerals extraction and processing. In Australia, battery supply chain participants have called on the government for support in light of US and European competition and comparatively low production costs in China. And the IRA rattled China, where industry has urged Beijing to boost support for lithium investments at home and abroad.

Likewise, the EU floated its Net Zero Industry Act, and other energy transition related policy strategies, in part as a response to the IRA.

"There's a big fear that the Inflation Reduction Act ... was attracting investment away from the European Union," said Simon Moores, CEO of Benchmark Mineral Intelligence, a price reporting agency specializing in battery metals. Moores pointed to plans by EV makers, including Tesla, to favor the US over the EU in light of the policies, which would have knock-on effects for materials supply chains crucial to the energy transition.

Hard to match

Other countries may not be able to match US efforts in some industries because of the scale of US investment and inherent disadvantages some regions have in launching policy, experts said. The EU, comprised of 27 countries, can't produce expansive spending bills as nimbly as a single country and it tends to use a more bureaucracy-heavy approach, experts said.

"In general, European businesses actually prefer the US IRA, because it's very straightforward," said Loyle Campbell, a research fellow at the German Council on Foreign Relations, a foreign policy think tank. "It's very simple. You go there. You open a business. And you get a tax rebate."

This is already evident in the EU's reaction, some experts said, characterizing the response as lacking financial punch. BMO's Hamilton noted the EU's green industrial policies promise little funding, compared to the scale of the IRA. Benchmark's Moores cast the EU's attempts to counter the IRA as reactive, though he expects the EU to outline firmer plans later this year.

"It was long. It was overly complex. And it had no money behind it," Hamilton said of EU policies such as the Net Zero Industry Act.

Countries with smaller economies, such as Canada, have taken more strategic approaches, targeting industries and materials more narrowly, experts said. Such countries will find it tough to counter the US' economic might.

"The production tax credit is unlike anything that I have directly seen in the battery industry over the last decade, perhaps with the exception of what's happened in China [in building out its EV supply chain]," said James Frith. Frith is a principal at Volta Energy Technologies, a firm that invests in energy transition companies, and the former head of energy storage analysis at BloombergNEF.

Amid accelerating plans to boost metal-intensive manufacturing to meet energy transition needs, the IRA puts pressure on resource-rich countries such as Canada to expand mineral extraction to help feed its close trading partners' industry, said Pierre Gratton, CEO of the Mining Association of Canada.

"The government knows its allies are counting on Canada to deliver," Gratton said, highlighting the US, the EU and Japan. "It's brought a much sharper focus on the government in terms of what it needs to do."

Boosting alliances

The flurry of quickened green industrial policies will bolster supply chains for energy transition materials and products outside China, experts said.

"We will end up with some form of allied supply chain here," said Hamilton, referring to the US and its close trading partners. Materials markets are already becoming segmented as companies build up supply chains to take advantage of incentives in the US and other countries including Canada, Hamilton and other experts noted.

Countries and regions such as the EU are also pushing for the US to broaden IRA rules to make sure they can take full advantage of tax incentives, especially new sourcing rules governing EV tax credits.

"And they're just working out the relationship now to [avoid] mega-scale industrial clashes," Moores said.

To support new regulations, countries outside China are also inking agreements on minerals sourcing and cooperation with one another. Some of these agreements are aimed at making materials sourced from outside the US eligible for use in EVs that qualify for tax credits under the IRA.

For example, the Minerals Security Partnership, an initiative aimed at boosting global critical minerals supply chains introduced in June 2022, includes nearly a dozen individual country partners plus the European Commission.

Likewise, the US and Japan, Germany and Australia, the UK and Australia, and soon the US and Indonesia have plans to cooperate on critical minerals sourcing or research, among other countries. In particular, the Japanese and Indonesian agreements with the US are aimed at satisfying free trade agreement requirements that would make battery minerals sourced from either of the two nations usable in EVs that are eligible for clean vehicle credits under the IRA.

S&P Global Commodity Insights reporters Camellia Moors and Kip Keen produce content for distribution on Capital IQ Pro.