The critical minerals requirement significantly impacts the overall cost of electric vehicles (EVs), primarily by increasing production costs in the short term. EV batteries currently rely on several critical minerals such as lithium, cobalt, manganese, nickel, and natural graphite. These minerals are essential for battery performance and the transition from fossil-fuel vehicles to EVs aimed at reducing greenhouse gas emissions.
The Inflation Reduction Act (IRA) imposes a critical minerals requirement where a specified percentage of the battery minerals must be extracted, processed, or recycled within the United States or in countries with which the U.S. has free trade agreements to qualify for tax credits. This percentage requirement is set to increase gradually from 40% in 2023 to 80% by 2027.
Because current EV supply chains are largely dependent on minerals processed in countries like China, meeting these localized sourcing requirements involves substantial supply chain restructuring and likely more expensive sources and processes. This drives up the cost of critical minerals and thus the batteries and ultimately the EVs themselves, at least initially. The short-term price increases are due to fixed costs associated with changing battery technologies and sourcing minerals outside of established, cheaper supply chains. This presents a market challenge since price competitiveness is critical to consumer adoption of EVs.
In summary, the critical minerals requirement increases the cost of electric vehicles in the near term by necessitating more expensive sourcing and processing of battery minerals within restricted regions, but it is designed to encourage domestic and allied supply chains and potentially stabilize long-term costs.
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