The array of tax incentives and subsidies contained in the 2022 Inflation Reduction Act appears likely to create supply shortages of critical energy minerals. That is the central finding in a new study published this week by S&P Global titled, Inflation Reduction Act: Impact on North America Metals and Minerals Market.
“The IRA impacts minerals in two ways,” the report’s authors write. “On the demand side, it does so by providing major stimulus and subsidies for a wide range of mineral-intensive decarbonization technologies, from electric cars to off-shore wind turbines. On the supply side, it seeks to promote mineral development by imposing percentage requirements for mineral content from the United States or countries with which it has a free trade agreement (“FTA countries”).”
The problem comes in the reality that the provisions appear likely to stimulate the demand side more rapidly and substantially than the U.S. and FTA countries will be able to produce and source needed supplies of critical minerals like nickel, cobalt, and copper. The report finds that projected U.S. demand for lithium, copper, nickel, and cobalt are materially higher post-IRA than they were before. Much higher, in fact. “Spurred by the IRA, energy-transition-related US demand for the critical minerals lithium, nickel and cobalt, taken together, will be 23 times higher in 2035 than it was in 2021. For copper, it will be twice as high,” the report says.
This is not surprising given the rapid pace at which we have seen announcements by startups and U.S. entries focused on mineral-intensive technologies since last September. I’ve personally interviewed more than half a dozen CEOs of these companies, every one of whom expressed their own concerns regarding future availability of adequate energy minerals to ensure the sustenance of their ventures.
While demand for these minerals exists in all of the promoted solutions to the energy transition, including wind turbines and blades and solar panels, the study finds that electric vehicle batteries are the most prominent driver of increased demand. When compared to pre-IRA projections, the study finds post-IRA demand for lithium to be 15% higher, cobalt demand 13% higher and nickel 14% higher. Copper is used in an even wider array of applications, and the study shows its demand projections for U.S. needs rises 12% post-IRA.
Many promoters of the transition are fond of pointing to recycling as a means of lessening overall minerals needs, a point the study notes. However, the authors point out that the U.S. battery recycling industry is in its infancy, and is not likely to grow to needed scale until late in the period between 2023 and 2035. They also echo a point made many times in this space, which is that the U.S. will be competing with other countries, not only western nations but international powers like China and India, for supplies of these mineral resources.
China especially has made enormous inroads into locking up major supplies of these minerals across the world through partnerships formed via its Belt and Road Initiative. Earlier this year, two Chinese firms entered into long-term agreements with the government of Bolivia to both develop its enormous untapped stores of lithium, and to process it and manufacture batteries using it. Given its lack of democratic institutions and processes, the Xi government has been able to move much more nimbly than the U.S. or European governments to enter into similar arrangements in other countries, like Indonesia.
“International competition for constrained resources is likely to increase as governments push their 2050 goals,” the report notes. “And, in this new era of Great Power competition, the quest for minerals will likely become entangled in the rising tensions between the United States and China, the latter of which has a predominant international position in minerals.”
Then there are the issues in the U.S. surrounding permitting new mines and other facilities necessary to produce and process the minerals. The central conundrum for the federal government in the Biden presidency and any other is that most of the delays in permitting can be sourced to major statutes whose goal is environmental protection: The Clean Air Act, the Clean Water Act, the National Environmental Policy Act, the Endangered Species Act, to name a few. This reality is a big part of the reason why, despite efforts ongoing since at least 2021 and even earlier, congress has struggled to gain a critical mass of support to enact streamlining legislation despite bipartisan support for the idea.
The report’s authors cite domestic development of copper as a prime examples of these permitting issues impacting supply. “There is an estimated untapped copper endowment of over 70 million metric tons in the US – equivalent to about three years of global production. But lengthy and complicated regulatory and permitting processes along with litigation risks inhibit the development of this endowment and, more broadly, mineral development in the United States.”
The Bottom Line
Throughout history, efforts by U.S. policymakers to enact policies designed to pick winners and losers in the energy space have been fraught with unintended consequences. If the findings in this study by S&P Global prove accurate, it appears the Inflation Reduction Act is destined to become no exception to that rule.
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