GRACELIN BASKARAN: Reflections on the one-year anniversary of the US Inflation Reduction Act

August 16 marks the one-year anniversary of the Inflation Reduction Act, the most significant climate legislation in American history. The legislation has provided significant funding and incentives to accelerate the transition to a clean energy economy, build energy security and reduce reliance on China. Though it has been highly successful, widening the number of eligible countries will be critical to meeting global demand for critical minerals in the years ahead. 

Over the past year the law has mobilised historic investments in clean energy and other green initiatives, including $110bn in clean energy manufacturing investments. This has included $70bn in building the electric vehicle supply chain and $10bn in solar manufacturing.

The act has provided benefits for more than 270 new clean energy projects that have generated 170,000 jobs (with a large share in Republican states that have historically shunned clean energy, including Texas and Georgia). It is expected to create another 1.5-million jobs over the next decade. 

But one of the more sensitive dimensions of the act is its geopolitics. The law was designed to enhance domestic energy security, but it also aimed to build energy security in partnership with countries with which it has free-trade agreements, especially Canada and Mexico. 

Over the course of the year some benefits were extended to Japan, a strategic ally, and in March the US and Japan signed a bilateral trade agreement to develop a supply chain for critical minerals required in electric vehicle production. The agreement provided a way for Japanese companies to tap into the law’s section 30D for clean vehicle credits. 

Not everyone is pleased with the Inflation Reduction Act. South Korea and the EU argue that it discriminates against foreign-made vehicles and thus breaches World Trade Organisation rules. The US has managed this by strengthening co-operation. 

Lack agreements

An important limitation of the act is that it doesn’t cover most resource-rich countries, with Australia, Canada and Chile the notable exceptions. These countries are treated the same as domestic US firms under the law. Most South American and African countries are largely excluded on the basis that they don’t have free-trade agreements. 

Chile, the world’s single largest lithium producer, has long had a free-trade agreement with the US. However, of three countries forming the “lithium triangle” with more than 75% of the world’s lithium — Bolivia, Argentina and Chile — two lack free-trade agreements and cannot tap into Inflation Reduction Act benefits. 

SA doesn’t benefit from the act despite having the largest reserves of manganese and platinum group metals; Brazil doesn’t benefit with its large niobium reserves; and Peru, Zambia and the Democratic Republic of Congo don’t benefit with their significant reserves of copper and cobalt. 

However, at the one-year anniversary of the law the US is increasingly using other mechanisms to build strategic alliances with some of these countries on the energy security front. 

TechMet, a private investment vehicle for critical minerals that is backed by the US government, recently raised another $200m in equity and is on track to have a valuation of more than $1bn. Additional funds have been provided by existing investors, including the US International Development Finance Corporation and private sector firms. New investors include S2G ventures, an impact platform founded by Lukas Walton (the grandson of Walmart founder Sam Walton). 

Gaping hole

The vehicle has announced that the additional $200m will be used to accelerate the development of 10 projects in its portfolio that aim to reduce global reliance on China for minerals including rare earths, vanadium and graphite. 

TechMet’s portfolio includes projects covering a range of critical minerals, about half of which are in countries that do not benefit from the act. This includes tin, tungsten and lithium mining in East Africa, nickel and cobalt mining and processing in Brazil, rare earths extraction in SA, and rare earth separation and production in Norway. 

One gaping hole remains. Eligible Group of 20 (G20) countries have about 16% of the world’s manganese, 4% of rare earths, no graphite, 17% of copper, 24% of cobalt and 31% of lithium. This emphasises the importance of extending benefits to resource-rich developing countries, to incentivise investments in mining and processing. It is impossible to meet demand for critical minerals without supply from non-Inflation Reduction Act-benefiting countries outside the G20. 

Though the act has been the most successful legislation in building strategic US interests since president Franklin Delano Roosevelt’s New Deal in 1933, the heart of good governance is being responsive to changing times and circumstances. And on the anniversary of the law’s promulgation it is worth reconsidering the inclusion of the countries that have the minerals required for the clean energy technology the US and its allies are building at speed. 

• Baskaran, a development economist, is a non-resident fellow at the Brookings Institution in Washington DC.