As 2024 kicks off, energy and climate policy discussions loom large in Washington. With the added complexity of the November presidential elections in the U.S., it remains uncertain what will happen regarding the increasingly partisan issues of environmental regulation and green industrial policy.

The Biden administration plans to continue implementing the Inflation Reduction Act, but Republicans in Congress could take action to hinder further progress. And government agencies, like the Federal Energy Regulatory Commission and the Environmental Protection Agency, could be significantly impacted by the Supreme Court’s ruling on a case that questions agencies’ ability to enact regulations. And this is just a tip of the iceberg what could happen this year.  So, what can we expect to happen in the nation’s capital on the energy and climate front this year? And where are we who follow this beat going to focus their attention? 

The passage of the Inflation Reduction Act marked not only significant climate action but efforts to shape industrial policy. Through billions of dollars of subsidies, the IRA aimed to quicken the pace and scale of the energy transition and also bolster domestic manufacturing and the economy. While providing an infusion of capital to America’s clean energy economy, the legislation heightened trade tensions around the world, with other countries vying to capture their share of clean energy supply chains. 

The humanitarian impact of the climate crisis on vulnerable communities, which have historically contributed the least to climate change, is now recognized in scholarship and policy. The question of financial payments–from developed to low-income countries– for loss and damage resulting from climate change was front and center recently at the world’s largest climate gathering, the 2023 United Nations Climate Change Conference (COP28). What has received far less attention is climate justice withincountries, such as India, that have deep-rooted and intersecting structures of inequality based on caste, gender, and religion. 

The Biden Administration’s new foreign entity of concern rule on critical minerals excludes Chinese sources and could pose significant challenges for the U.S. energy transition. As the world races toward a greener future, the precarious balance between securing critical minerals such as lithium, copper, and cobalt and navigating the complex geopolitics of global supply chains has emerged as a pivotal battleground in the fight against climate change.

Unfortunately, the Biden administration’s newest rules exclude Chinese critical minerals and will make it very difficult for the U.S. to reach its energy transition objectives. Biden has caved to electoral pressure and the strong anti-China rhetoric in U.S. political discourse, rather than being pragmatic about China’s key role in global supply chains.

The administration’s goal to diversify its supply chains from China was necessary, smart, and has already been impactful in changing the rules of the game. The newest proposed rules on foreign entities of concern (FEOC), however, are set to decouple from China, rather than diversify from it – a project that will lead to a slower adoption of electric vehicles (EVs) when Americans desperately need to be using more of them.

Ensuring the U.S. tax credits from the Inflation Reduction Act (IRA) don’t enrich potential opponents is a worthwhile goal – but one that needs to be balanced against China’s critical role in current supply chains, experience in building EVs, and the sheer urgency of the climate transition.

The new proposed Treasury rules and DOE interpretive rule will mean that fewer EVs will qualify for the $7,500 tax credit that the IRA decided on to accelerate the green transition. This is a direct result of Chinese involvement in the supply chain. Fewer vehicles qualifying for the credit will mean higher EV prices and, ultimately, slower EV adoption, equating to higher emissions. At the same time, U.S. automakers will struggle to compete in the international EV market.

The goal of the IRA was to lower emissions and support American manufacturing, but this strict ruling limits both goals, at least as far as automakers are concerned. Only around 20 of the 100-plus EV models sold in the United States currently qualify for the full 30D tax credit. The proposed rules will result in even fewer of them qualifying.

The new regulations are a bet that the United States and free trade agreement (FTA) countries will be able to quickly ramp up their mining and processing of critical minerals. Biden likes to say, “It’s never a good bet to bet against America,” but this time he may have backed the wrong horse. There is limited evidence to suggest the United States can ramp up production and processing in the short term because of permitting issues, a lack of technical know-how, lack of economic competitiveness, and a lack of social support from local and Indigenous communities.

The IRA’s electric vehicle subsidies always stipulated that the building blocks of battery materials would not be able to come from foreign entities of concern – a list that includes China. To the dismay of those involved in the supply chain, however, there was no clarification on this rule until just now, a month before the foreign entity of concern rule comes into force.

The new proposed rules confirm that if EVs want to qualify for the full IRA tax credit, they cannot include minerals or materials produced by companies with more than 25 percent ownership by foreign entities of concern – measured in terms of number of board seats, voting rights, or equity interest.

Last spring, U.S. Sen. Joe Manchin, a China hawk skeptical of the energy transition, dismissed the idea that American companies needed the assistance of Chinese companies: “You’re telling me we don’t have the smart people and the technology, and we can’t get up to speed quick enough? That doesn’t make sense.” Unfortunately, it does make sense, and the proposed rules now allow Chinese companies to create more global competitiveness in EV production compared to U.S. firms.

From mineral processing to battery technology, China dominates battery supply chains. Over a decade ago, the Chinese government took a decision on a battery-powered future and solidified a supportive industrial policy around that decision, while Western governments were predominantly concerned with oil supply, fuel efficiency, and biofuels. As a way to decarbonize the transportation sector, fuel efficiency standards fell short and biofuels were largely a flop. In some cases, such as European biodiesel, this even led to more emissions because of several land-use change impacts.

China’s strategy of over a decade ago is exactly what the IRA now aims to do: Use state support, industrial policy, and local content requirements to create competitiveness. Diversifying American sources is essential – but that can’t mean decoupling entirely from China in an industry where it has a comparative advantage that the world now needs in its fight against climate change.

Batteries require critical minerals that are extracted and then processed to make sure they have a very high purity so eventual batteries perform well. Thanks to its past investments, China has a dominant position in both extraction and processing.

Besides extracting most of the world’s graphite, which is used in battery anodes, China also has ownership stakes in overseas lithium, nickel, and cobalt mines, including in countries that are U.S. free trade partners such as Australia and Chile. Because of the 25 percent ownership requirement, it is now likely that a lot of this material will not be IRA-compliant. For example, China-based Tianqi Lithium controls a 26 percent stake in one of the world’s largest lithium mines, Greenbushes in Australia.

The new rules may affect ownership structures, but changing those requires huge investments – and there isn’t time for new mines to be developed specifically to cope with U.S. needs. Critical mineral mines have, on average, taken more than 16 years between exploration and first production. The IRA subsidies run for nine more years.

China’s dominance is even more pronounced in terms of mineral processing. Over the course of three decades, G-7 countries and companies offshored mineral processing to China to be economically efficient. That worked, but it also created a global superpower that threatened supply chain security.

On processing, the new regulations make a potential FTA with nickel-rich Indonesia less relevant in the short term. Indonesia is the leading producer of nickel, and its export ban on raw ore forced Chinese companies to relocate for nickel processing through high-pressure acid leach, or HPAL. But all of the HPAL facilities operating in 2023 are majority-owned or operated by Chinese companies.

The U.S. cannot simply get out of China’s dominance by using local content restrictions. It will also have to devise a firm industrial policy that includes fiscal support, labor and migration policies, and permitting reform to encourage domestic manufacturing.

The same holds true for battery technology, where China holds a large advantage, specifically for lithium-iron-phosphate (LFP) batteries, which require fewer critical minerals than others that need nickel and cobalt. This is why Ford signed an agreement with the world’s largest battery producer, China’s Contemporary Amperex Technology (CATL).

When the plant was announced, Ford said the partnership with CATL would “help us get up to speed so we can build the batteries ourselves.” The LFP cells would provide Ford with a 10 percent to 15 percent cost savings on minerals compared to nickel-manganese-cobalt batteries. At a time when American original equipment manufacturers are struggling to bring the price of EVs down, every bit of help is vital.

The proposed rules will allow the licensing of technology, but under strict specifications that require the licensed technology not to exercise effective control, which includes the exclusive right to maintain, repair, or operate equipment. They also require access to intellectual property. Whether CATL will be willing to play this game just to access IRA subsidies is highly uncertain.

Here, too, however, the U.S. will need a more determinate industrial strategy than only using local content requirements. The U.S. has among the best R&D players in the world, but to put this into perspective, CATL alone has about 18,000 R&D staff. China excels in helping technologies get to market. Here the U.S. has struggled in the past. For example, LFP technology was developed in North America, but because nickel-based batteries had higher energy density compared to LFP, patents were released to Chinese companies, which then used them to develop a battery chemistry that is capturing almost 40 percent of the global EV battery market today.

Yes, ultimately, automakers will have the potential to source all of their minerals and components from the United States and FTA countries over time, but in the coming years, Chinese automakers will gain global competitive advantages as a result of more efficient supply chains. It is that balance between efficiency downstream and upstream supply chain resiliency that the proposed rules get wrong.

This is a shame, since the IRA had already been changing the game for the better. Since its enactment, Chinese companies have acknowledged these new rules. They have been willing to engage in joint with South Korean companies, which can supply IRA-compliant critical minerals to battery manufacturers and automakers in the U.S. Because of the IRA, Chinese players were willing to accept minority stakes in such joint ventures, effectively weakening their grip on the supply chain.

As the POSCO Future M CEO Kim Jun-hyung said, “If the U.S. restricts Chinese firms from holding a certain amount of stakes in their joint ventures here, we will adjust our Chinese partners’ stakes in joint ventures with us to become smaller than the amount.”

This is what geopolitical success in complex and interconnected global supply chains looks like. China hawks should recognize those victories – not try to snap supply chains entirely.

Assertive diversification, not decoupling, is needed – and that requires a holistic industrial policy strategy, not just local content restrictions that will end up sabotaging U.S. automaker interests and the climate in the short term.

/Center on Global Energy Policy/