America’s Inflation Reduction Act is asking too much of car manufacturers and electric vehicle supply chains

Suffice it to say, the IRA is a tremendous ask of car manufacturers selling in the US, the majority of whom currently source their critical materials and manufacture their battery components outside of North America and other FTA partners. A number of US and foreign automakers, some better positioned than others, are apprehensive about their ability to deliver eligible EV models in time.

For the climate, time is of the essence, but the IRA cannot solve supply chain shortcomings in the near future

Indeed it appears that American climate policy-makers have acted ambitiously in their own self-interest. To contextualize, I posit two questions on the efficacy of the clean vehicle tax credit provisions of the IRA: Can the US do this? And should the US do this?

1) Can the US do this?

The first question speaks more to the efficiency and success of the act than the legality of its provisions. Recall the two key IRA aims previously discussed: secure a domestic EV supply chain and reduce carbon emissions. From the latter perspective, success appears constrained. The balance is arduous and in many ways contradictory: accelerate EV sales at an affordable price point all the while meeting strict domestic supply chain constraints. Presently, automakers in the US cannot do both—at least not in the near term. When the new EV tax credits come into effect in January 2023, less than 30% of EV models sold in the US will be eligible for full subsidy. America cannot afford to limit subsidy eligible EVs, especially when demand outweighs supply. From a domestic industry perspective, success appears imminent. Since the signing of the IRA, more than $13 billion of investment, largely from foreign companies, into North-American critical material production and battery and EV manufacturing has been announced. Promising as these announcements may seem, gigafactories take a few years to develop—mines closer to 7+ years—and are often plagued with delays. Bloomberg estimates an increase in US EV sales post-IRA, but what would sales projections look like with less strict supply chain requirements? The IRA may secure a domestic battery and EV industry in the mid to long-term but is limiting EV adoption in the short term when emissions reductions are needed most.

2) Should the US do this?

Even if the US can do this—does that mean it should? In effect, the IRA decouples America from global clean-technology supply chains. For battery supply chains in particular scholars argue for diversified supply chain and R&D strategies. Critical materials are globally traded commodities because they are sourced globally. Does a “North-America+FTA-partner-made-battery” even make sense? Resource wise, perhaps?—at medium demand levels. Cost and environmental performance wise, hardly given higher electricity prices and heavy natural gas reliance in parts of the US. Globally, the rest of the world also stands to lose from US isolationist policy. A recent EU document challenging the IRA rightly points out that the act turns a “common global objective—fighting climate change—into a zero-sum game.” No one benefits from a trade war. From a European standpoint the IRA is both worrisome and problematic, but escalating the situation further by implementing retaliatory subsidies of their own could invite backlash from other trade partners.

One step too far

It is difficult to be too critical of the IRA. Ultimately, it is a large financial investment into clean technology at a highly opportune moment. For a polarized nation politically at odds on the topic of climate change, prioritizing local jobs and industry was the workaround to successful enactment. However, I would argue here that the US took this isolationist policy one step too far. Globalization is essential for EV supply chain resilience, and frankly, there is no reason the burgeoning green auto industry should be impeded by cold war-esque geopolitics.