New EV tax credit rules ‘win-win’ for U.S. and ROK, but uncertainty remained

On Monday, April 24, Center for Energy Governance and Security at Hanyang University Director Younkyoo Kim said that recent Internal Revenue Service guidelines for implementing the Inflation Reduction Act’s electric vehicle tax credit were a ‘win-win’ outcome for the United States and South Korea that has reassured Korean manufacturers and the Korean public, at least in the near term.

Professor Kim spoke at a joint meeting hosted by the Korea Foundation USA and Energy Innovation Reform Project. Sung Won Bae, Director of Korea Foundation USA, opened the meeting before turning the discussion over to moderator Paul Saunders, President of Energy Innovation Reform Project, and panelist Jane Nakano, Senior Fellow of the Energy Security and Climate Change Program at the Center for Strategic and International Studies.

The event, “Critical Minerals and Batteries in the U.S.-Korea Relationship,” examined how recent policy developments and competing economic interests have affected U.S. and Korean relations, particularly since the passage of the Inflation Reduction Act (IRA), which established tax credit of up to $7,500 for individuals purchasing EVs.

Eligibility for half of the IRA EV tax credit ($3,750) requires that an escalating share of the value of critical minerals in the battery must be extracted or processed in the United States or in a country with a U.S. free trade agreement (FTA). (This share starts at 40% in 2023 and increases 10% each year to 80% in 2027.) Eligibility for the other half of the credit requires that similarly increasing shares of the value of battery components be manufactured or assembled in North America. (In this case, the share increases from 50% in 2023 to 100% in 2029.) 

Kim explained Korean EV manufacturers were initially concerned about their ability to produce vehicles that would qualify for the credit because they rely heavily on China for battery minerals—a market that Beijing dominates. Korea lacks significant mineral resources as well as a processing industry to produce the so-called precursor chemicals used to make batteries, he said, and buys “everything” other than battery anodes and cathodes (the battery components that release and absorb electrons, creating an electric current) from China. The new rules reassured Korean firms, he said, by more clearly defining the process that the IRS will follow in assessing the relative value of battery components.

Nevertheless, Kim added, firms remain anxious about another provision in the law that denies eligibility for the tax credit if battery components or critical minerals come from a “foreign entity of concern.” This requirement takes effect in 2024 for battery components and in 2025 for critical minerals, but the U.S. Treasury Department has yet to announce a list of foreign entities of concern or to specify whether “entities” will be countries (e.g., China—a tougher restriction) or individual firms. Kim said that he expected ROK President Yoon Suk Yeol to push for additional flexibility in the EV tax credit rules during his summit with President Joe Biden.

Nakano reviewed the history of U.S. policy on critical minerals, which she asserted had historically focused on ensuring adequate supplies for defense-related manufacturing. This began to change in 2010, she said, when China imposed unofficial export restrictions on rare earth exports to Japan following a maritime dispute. She noted that in 2018, the U.S. Geological Survey released a draft list of 35 minerals deemed critical to the U.S. economy and found that the United States was 100% dependent on imports for 14 of the minerals and relied largely on China for these supplies. Concerns surrounding critical mineral supply chains drove actions by both the Trump and Biden administrations to establish more secure supplies, Nakano said.

Nevertheless, she argued, the United States should not and is not seeking to unseat China as the world’s leading supplier of critical minerals—this would not be a realistically attainable goal for America. Instead, Nakano said, the U.S. should use federal legislation and policy to diversify and strengthen critical mineral supply chains. This could help both to depoliticize the issue and to strengthen U.S. allies like South Korea that are integral supply chain partners. That said, the Biden Administration, the U.S. Congress, and U.S. allies are not fully aligned on critical mineral supply chains. This could make it harder to reach a satisfactory consensus on EV battery and mineral sourcing rules.

Nakano urged an “integrated approach” to strengthening U.S. critical mineral and battery supply chains. She emphasized the tools available to policymakers under the Defense Production Act (1950), which can help to guarantee demand for domestic mineral producers, and the Infrastructure Investment and Jobs Act (2021), which provides federal support for battery manufacturing and recycling as well as developing new technologies.

Participants asked Nakano and Kim how the U.S. and ROK could meet EV tax credit eligibility requirements for critical minerals if permitting processes and environmental regulations constrain the development of mineral extraction and processing facilities. Nakano emphasized the need for federal permitting reform to establish a better regulatory framework and for deeper cooperation with resource-rich allies like Australia and Canada that have established frameworks for extractive industries. Kim was less concerned with a new regulatory framework and stressed the desirability of technological innovation, especially cost-effective recycling technologies that could reduce future critical mineral demand.

While the session focused primarily on the critical mineral requirements for EV batteries, Kim called for greater attention to rare earth magnet supply chains; high strength permanent magnets in EVs and other products require rare earth metals and China also leads in this global market.

In concluding the discussion Saunders drew attention to the inherent tensions in U.S. relationships with Korea and other key allies, which are strong partners on national security yet often economic competitors as well. Managing these tensions is a central task for U.S. diplomacy, he said.

Saunders ended the meeting by acknowledging the Korea Foundation for their support of Energy Innovation Reform Project’s work on U.S.-Korea relations.

Alex Stickney is Program Manager at Energy Innovation Reform Project.