By Troy Stangarone
The Inflation Reduction Act (IRA) has complicated U.S.-Korea relations and spurred accusations by one senior Korean official that the new electric vehicle (EV) requirements are a "betrayal." However, the IRA is also a complex piece of legislation designed significantly to reduce U.S. greenhouse gas emissions and reshape supply chains for critical minerals.
The IRA is the most important piece of climate change legislation ever passed by the U.S. Congress. Its climate provisions are expected to reduce U.S. greenhouse gas emissions between 37 percent and 41 percent below 2005 levels by 2030.
As the world's second-largest emitter of greenhouse gases, the act is an important step by the United States to meeting its contributions to helping the world reduce emissions enough by 2050 to prevent global average temperatures from rising more than 1.5 degrees Celsius ― the point beyond which scientists believe the world will reach a series of "tipping points" that would begin reshaping the environment.
Ideally, the IRA would have blended the United States' established commitments to free trade with environmental objectives, but here the legislation falls short. It is important, however, to understand why that is the case.
Enacting climate change measures in the United States has historically been challenging. Congress stymied the Kyoto Protocol and has refused to enact a carbon tax or cap-and-trade system, and the Trump administration began the process to remove the United States from the Paris Climate Accords and worked to revive the coal industry. That is not to say there has been no progress, but there is significant pushback to climate measures in the United States.
The path from the Biden administration's Build Back Better initiative to the IRA has been no less challenging.
Republicans were united against Build Back Better, forcing Democrats to scale back the initiative and use a special budgetary procedure that required the support of all 50 Senate Democrats.
However, Democrats were not united in their support of the legislation. Senators Joe Manchin and Kyrsten Sinema pushed for a smaller, more targeted bill. After the legislation was considered dead, Senate Majority Leader Chuck Schumer negotiated the final bill with Manchin who insisted that the legislation reduce inflation and limit any new spending. The Biden administration was presented with a take-it-or-leave-it option.
One key component of the legislation consists of provisions designed to promote the sale of EVs in the United States. However, the requirement that EVs be assembled in the United States to be eligible for tax credits has understandably raised concerns in Korea, as well as Europe. At the moment, 26 of the 32 EV models sold in the United States are assembled domestically. Hyundai and Kia are not expected to have a facility to produce EVs in the United States until 2025, putting them at a disadvantage. Outside of U.S. manufacturers, only the Nissan Leaf and a few European models are produced in the United States.
Eligibility for the tax credit becomes more complex beginning next year when the $7,500 tax credit will be divided into two categories ― one related to the mineral content of EV batteries and the other for the battery components. To be eligible for $3,750 of the tax credit, 40 percent of the minerals in EV batteries will be required to come from the United States or U.S. FTA partners. For the other half of the tax credit, 50 percent of the components will need to come from the United States or U.S. FTA partners. However, by 2025, none of the battery minerals or components may come from a foreign entity of concern, such as China.
These restrictions are designed to develop new supply chains that will reduce the dependence of the United States ― and indirectly its allies ― on China for the critical minerals and parts that go into EV batteries.
At the moment, China dominates both the mining and processing of the minerals needed for EV batteries and other critical technologies. That presents a national security risk to the U.S. and its allies, but will be difficult to unwind. For example, even though around 50 percent of the world's lithium is mined in Australia ― a U.S. FTA partner ― around 60 percent of it is refined in China. Because of these dependencies it is unclear if any automaker will be able to meet the content requirements that come into place next year, whether they are assembled in the U.S. or not.
Working with Korea to address this issue, something U.S. officials have indicated a willingness to do, is critical for the United States. The ability of the United States to transition to EVs is dependent on Korean battery makers. The vast majority of the U.S.' new production capacity for EV batteries set to come online by 2025 will be from Korean firms or Korean joint ventures. If Korean firms aren't able to transition away from their dependence on China by 2025, it will be not just Hyundai and Kia that face losses, but also the Biden administration's effort to transition to EVs.
Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.
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The IRA is the most important piece of climate change legislation ever passed by the U.S. Congress. Its climate provisions are expected to reduce U.S. greenhouse gas emissions between 37 percent and 41 percent below 2005 levels by 2030.
As the world's second-largest emitter of greenhouse gases, the act is an important step by the United States to meeting its contributions to helping the world reduce emissions enough by 2050 to prevent global average temperatures from rising more than 1.5 degrees Celsius ― the point beyond which scientists believe the world will reach a series of "tipping points" that would begin reshaping the environment.
Ideally, the IRA would have blended the United States' established commitments to free trade with environmental objectives, but here the legislation falls short. It is important, however, to understand why that is the case.
Enacting climate change measures in the United States has historically been challenging. Congress stymied the Kyoto Protocol and has refused to enact a carbon tax or cap-and-trade system, and the Trump administration began the process to remove the United States from the Paris Climate Accords and worked to revive the coal industry. That is not to say there has been no progress, but there is significant pushback to climate measures in the United States.
The path from the Biden administration's Build Back Better initiative to the IRA has been no less challenging.
Republicans were united against Build Back Better, forcing Democrats to scale back the initiative and use a special budgetary procedure that required the support of all 50 Senate Democrats.
However, Democrats were not united in their support of the legislation. Senators Joe Manchin and Kyrsten Sinema pushed for a smaller, more targeted bill. After the legislation was considered dead, Senate Majority Leader Chuck Schumer negotiated the final bill with Manchin who insisted that the legislation reduce inflation and limit any new spending. The Biden administration was presented with a take-it-or-leave-it option.
One key component of the legislation consists of provisions designed to promote the sale of EVs in the United States. However, the requirement that EVs be assembled in the United States to be eligible for tax credits has understandably raised concerns in Korea, as well as Europe. At the moment, 26 of the 32 EV models sold in the United States are assembled domestically. Hyundai and Kia are not expected to have a facility to produce EVs in the United States until 2025, putting them at a disadvantage. Outside of U.S. manufacturers, only the Nissan Leaf and a few European models are produced in the United States.
Eligibility for the tax credit becomes more complex beginning next year when the $7,500 tax credit will be divided into two categories ― one related to the mineral content of EV batteries and the other for the battery components. To be eligible for $3,750 of the tax credit, 40 percent of the minerals in EV batteries will be required to come from the United States or U.S. FTA partners. For the other half of the tax credit, 50 percent of the components will need to come from the United States or U.S. FTA partners. However, by 2025, none of the battery minerals or components may come from a foreign entity of concern, such as China.
These restrictions are designed to develop new supply chains that will reduce the dependence of the United States ― and indirectly its allies ― on China for the critical minerals and parts that go into EV batteries.
At the moment, China dominates both the mining and processing of the minerals needed for EV batteries and other critical technologies. That presents a national security risk to the U.S. and its allies, but will be difficult to unwind. For example, even though around 50 percent of the world's lithium is mined in Australia ― a U.S. FTA partner ― around 60 percent of it is refined in China. Because of these dependencies it is unclear if any automaker will be able to meet the content requirements that come into place next year, whether they are assembled in the U.S. or not.
Working with Korea to address this issue, something U.S. officials have indicated a willingness to do, is critical for the United States. The ability of the United States to transition to EVs is dependent on Korean battery makers. The vast majority of the U.S.' new production capacity for EV batteries set to come online by 2025 will be from Korean firms or Korean joint ventures. If Korean firms aren't able to transition away from their dependence on China by 2025, it will be not just Hyundai and Kia that face losses, but also the Biden administration's effort to transition to EVs.
Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.
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