A key critical minerals tax incentive would phase out in 2031 and strictly exclude the use of any materials produced or processed by a foreign entity under a budget bill passed by the US House of Representatives on May 22.
The move could prove onerous for domestic steel, aluminum and critical minerals projects that relied on the credits, industry leaders told Platts, part of S&P Global Commodity Insights.
The advanced manufacturing credit, referred to as Section 45X, was established by the 2022 Inflation Reduction Act (IRA). The provision created eligible tax credits equal to 10% of production costs of US critical mineral production, including lithium production and aluminum smelting. In addition, the credit supported clean energy projects, which became buyers of steel and aluminum.
Under Section 45X, critical minerals production received tax credits indefinitely, whereas credits for the manufacturing of clean energy components were set to expire for most products in 2033, with 25% reductions each year starting in 2030.
But the new House budget bill amended the provision by adding critical minerals to the step-down schedule for clean energy components. It also reduced credit phaseouts from a three-year schedule to a two-year schedule, ultimately eliminating the credit after Dec. 31, 2031.
President Donald Trump, who declared a national energy emergency on his first day in office, has rolled back renewable energy initiatives while simultaneously championing for an increase in domestic manufacturing projects.
"While many parts of the IRA are not aligned with the administration's climate agenda, policymakers should realize that many of the initiatives funded by the IRA are steel intensive and create steel demand and jobs. Solar, wind, hydrogen and EVs require tons of domestically produced steel," said Philip Bell, president of the Steel Manufacturers Association (SMA).
Impacts to aluminum, steel
The advanced manufacturing credits subsidize the production of solar energy components, wind energy components, battery components, inverters and critical minerals.
"Section 45X credits create benefits that encourage manufacturing in the US and reduce reliance on foreign counterparties and foreign countries," said Michael Sykes, a partner in tax practice at law firm White & Case LLP.
"You’re creating more separation from reliance on foreign producers of things that are critical for energy," Sykes said.
The production of primary aluminum and its input alumina both qualify for advanced manufacturing tax credits due to their classification as critical minerals.
"The Aluminum Association continues to support the [Section] 45X tax credit that helps manufacturers make more critical minerals in the United States and provides business certainty to support continued growth and investment," Will Brown, vice president of government relations and international programs for US trade group the Aluminum Association, said in an email to Platts.
"As the reconciliation process continues, the Aluminum Association will continue to work with Capitol Hill champions to underscore the importance of [Section] 45X for American aluminum manufacturers and increased self-sufficiency," Brown said.
US aluminum smelters have substantially benefited from the law's tax credits, which cover 10% of input costs, including electricity. Primary aluminum production has "enormous" electricity requirements, with a single new aluminum smelter requiring roughly the same amount of electricity per year as the city of Boston, according to the association.
"[Removing the Section 45X tax credit] is running counter to the stated objectives of the administration. The administration wants to reshore domestic manufacturing, and they want to see primary aluminum production," said Annie Sartor, the aluminum campaign director for Industrious Labs, a nonprofit promoting sustainability in heavy industry. "They want to see a new smelter or even two new smelters come online, and eliminating the tax credit undermines those goals."
Companies buy wind turbines and solar panel components from other countries like China and request exclusions and exemptions due to lack of domestic availability, the SMA's Bell told Platts.
"Steel industry’s argument for a long time is if you want us to produce more of these components domestically, you should provide incentives that help offset our regulatory, raw material, labor and energy costs," he said.
Bell said some steel producers think phasing out this credit will negate already announced investments. About $125 million in investments in everything from critical minerals to steel were related to Section 45X credits and are now in jeopardy, he said.
House adds foreign entities provision
Goods qualifying for the Section 45X credit must be produced in the US, but there are limited prohibitions on foreign ownership of the companies receiving the credits.
New inclusions in the House budget bill expand restrictions on certain foreign entities having a role in the production of minerals, Sykes said.
A company can no longer receive Section 45X credits if any component, subcomponent or applicable critical mineral included in the product is extracted, processed, recycled, manufactured or assembled by 'foreign entities of concern', specifically China, Iran, Russia or North Korea.
China's key position in the supply chains of rare earths and other key mineral means stricter rules could pose a problem for clean energy projects.
"It creates a much more difficult or onerous burden on a developer of a project to know all the way down the supply chain exactly what’s in everything that they are putting into their project," Sykes said.
Senate debates repeal of IRA energy credits
The House budget bill is now in the Senate where several lawmakers — including Republicans from red states with facilities that benefit from the credits — have opposed repeals to IRA energy credits.
Republican senators Lisa Murkowski (Alaska), John Curtis (Utah), Thom Tillis (N.C.), and Jerry Moran (Kan.) sent a letter to Senate Majority Leader John Thune (R-S.D.) in April supporting energy tax credits.
"Many American companies have made substantial investments in domestic energy production and infrastructure based on the current energy tax framework," they wrote. "A wholesale repeal, or the termination of certain individual credits, would create uncertainty, jeopardizing capital allocation, long-term project planning, and job creation in the energy sector and across our broader economy."
Military leaders from SAFE, a nonprofit focused on improving America’s energy security, called the IRA credits "critical to safeguarding US national and economic security, bolstering domestic industrial capacity, and reducing dependence on foreign adversaries."
"The Section 45X credit plays a role in offsetting this differential and has incentivized vital private investment to reduce reliance on [China]-controlled sources for materials essential to modern defense platforms, energy technologies, and electric vehicles," they wrote in a May 8 letter to congressional leaders.
Negotiations in the Senate could amend the House version of the budget bill and change provisions related to IRA tax credits. The bill would then need to clear the House again.
Republican congressional leaders have set a July 4 deadline for getting the budget bill to the White House.
