The Inflation Reduction Act (IRA), which was passed in August, will result in historically increased investment to combat climate change. As a result, some forecast significant decreases in carbon dioxide emissions in the US. However, for that to occur, the law’s implementation must go without a hitch, which is now far from certain. How is a Lithium Crisis Related to an Act to Reduce Inflation?
There is no direct connection between a lithium crisis and an inflation reduction act, although rising lithium prices due to supply shortages could contribute to inflation. Instead, as this regulation is put into effect over the coming years, there will certainly be considerable speed bumps. Perhaps nowhere is this more evident than in the regulations governing electric vehicles (EVs), their battery systems, and the essential minerals they contain, particularly those that deal with lithium.
Batteries for electronic devices, such as those in electric vehicles (EVs) and the ubiquitous laptops and cell phones used by Americans, employ lithium. The IRA makes several significant changes to the federal EV subsidies.
First off, a cap on the number of clean vehicles that can qualify for a $7,500 tax credit has been removed. This means that certain EV and plug-in hybrid purchases will now qualify for the credit, whereas they previously wouldn’t.
After 2023, some more pricey vehicles won’t qualify for credits, and new income restrictions will further limit who is eligible for a rebate. Additionally, pre-owned EVs will qualify for a rebate of up to $4,000 if no other eligibility limits apply.
The Inflation Reduction Act (IRA’s) new restrictions will have an impact on lithium-based batteries, which are a crucial component of electric vehicles (EVs), as well as other vital minerals.
Lithium prices have increased recently, and output has increased significantly as well. In 2008, known stocks began to grow. New reserves did not initially cause a rise in production.
That started to shift about 2016, which was also the price increase time. The production has significantly increased since 2016. And thus, the Inflation reduction act caused a lot of change. Let’s have a look.
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What is the Inflation Reduction Act of 2022?
Before looking how could the inflation reduction act lead to a shortage of lithium?
Let’s see what the inflation reduction act is.
The Inflation Reduction Act (IRA), billed as the biggest climate law in US history, contains tax credits, incentives, and other provisions meant to assist businesses in addressing climate change, increasing their investments in renewable energy sources, and improving their energy efficiency.
The act, which President Biden signed into law on August 16, 2022, also handles corporate taxes and healthcare, but the climate-focused provisions are particularly crucial.
The IRA is predicted to advance decarbonization in a variety of ways, such as:
- increasing demand for electric cars (EVs), low-carbon building materials, and sustainable technologies.
- By extending tax incentives and increasing financing, renewable energy will grow more quickly.
- encouraging innovation through clean technology research and development (R&D) and the creation of low-carbon materials.
- generating demand for low-carbon products for use in transportation and federal building projects.
The law offers many businesses in various industries fantastic opportunities to fulfill their commitments to sustainability and carbon reduction while also clarifying the route to get there.
Additionally, it presents a chance to spur growth that might affect every aspect of your company, including tax, finance, sustainability, operations, supply chain, risk management, and product development.
Lithium-Related Requirements.
Another notable change is the requirement that the final assembly of clean vehicles eligible for the tax credit takes place in North America and that critical minerals, such as lithium, used in batteries, be sourced from either North America or U.S. trading partners.
Vehicles won’t be eligible for subsidies after 2024 if their minerals or parts are sourced from “foreign entities of concern” like China and Russia.
The table below shows how the IRA’s critical mineral requirements are implemented gradually.
| Year | Critical mineral requirements in the U.S. | Battery production in the U.S. |
|---|---|---|
| 2024 | 40% | 50% |
| 2026 | 80% | 100% |
Consumer costs will probably increase as a result of meeting these standards since automakers are discouraged from employing labor and parts that are less expensive in other countries.
The question of whether automakers can even fulfill these standards is significantly more important.
Due to the low level of lithium production in the country at the moment, imports of this mineral are significant. Although there is a chance for change, it will mostly depend on how technology, government regulations, and public opinion evolve.
Except for Australia, lithium tends to be concentrated in a small number of countries worldwide, and these are likely not to be those with free trade agreements that match the requirements outlined in the IRA.
A Brief History of the Lithium Markets.
There will only be one domestic lithium manufacturer in the United States as of 2022. The brine operation site in Esmeralda County, Nevada, known as Silver Peak is managed by AlbemarleALB Corporation.
This too might alter. For instance, the Salton Sea is a landlocked lake that is situated north of the border between California and Mexico.
According to the California Energy Commission, the geothermal brines in the Salton Sea may contain enough dissolved lithium to satisfy 40% of global lithium demand.
However, the extraction of this lithium is a challenging, technologically advanced, and at least partially unproven procedure. Before any lithium is commercially available, it could take several years.
Due to limited domestic production, imports of lithium into the United States have increased dramatically since the early 1980s, rising from roughly 80 metric tonnes in 1984 to over 2,600 tonnes in 2019. (with a lot of fluctuation in between).
Unsurprisingly, increasing costs have been matched by a rise in demand. A smaller price increase peaked in 2016, and a larger one—still going strong—started in 2020. The IRA might exacerbate existing price pressures.
Lithium prices have increased recently, and output has increased significantly as well. In 2008, known reserves started to rise. New reserves did not initially cause a surge in production.
That started to shift about 2016, which was also the time of the price increase. The production has significantly increased since 2016.
Australia, Chile, and China have produced the majority of the increased supply. Chile has the biggest deposits of these, making up around 40% of the global total. Australia, however, produces more lithium than Chile does.
Although it will be some time before they become significant competitors if at all, Argentina and Bolivia can compete in this market.
Bolivia, for instance, has struggled to capitalize on the abundance of its natural resources since a bungled nationalization attempt in 2008. Bolivia produced only 540 tonnes of lithium carbonate in 2021, or what Chile produces in a day and a half, according to a Wall Street Journal study.
Additionally, Mexico recently nationalized its lithium extraction and mining businesses, and it is currently establishing a state-run public utility to oversee these activities on behalf of the government.
Although many investors are hopeful Argentina will perform better than other countries, success will depend on establishing a solid legal system and protections for international investment.
From 2016 to 2019, 90% of the lithium imported into the United States came from Chile and Argentina, according to the Department of Energy. But as indigenous organizations organize to reject numerous new projects, Chile’s fortunes may be about to take a turn for the worst.
Looking forward.
Considering its standing as a reliable trading partner of the United States and a nation with a reputation for having strong property rights, Australia—currently the largest lithium producer in the world—may stand to gain the most from the Inflation Reduction Act, at least in the short term.
Although the Salton Sea’s untapped potential hasn’t been fully realized, as of 2021, U.S. lithium deposits only made about 4% of the entire global reserves.
Another area of possibility in the US is the recycling of used battery parts.
The current state of the world’s lithium market is uncertain. A significant determinant of whether the United States can achieve its objectives under the IRA may be the public’s opposition to mining.
If demand trends continue on their current track and supply stays restrained by political and societal constraints, pressures on prices and production will undoubtedly increase.
One thing is certain: expect to hear more about this subject in the months and years to come. Some of these pressures will be beyond the control of domestic lawmakers.
Benefits of the Inflation Reduction Act for Lithium Miners.
The Inflation Reduction Act will provide several incentives, such as increasing the use of electric vehicles, to promote renewable energy. As a result, this ought to increase lithium demand and mining activities.
According to Chris Berry, energy metals strategist and head of the American consulting firm House Mountain Partners, “[The IRA] is a net positive in that the legislation the Biden administration has signed into law will go a long way towards accelerating the build-out of a more regionalized EV supply chain.”
Although permitting timelines are not covered by the legislation (they will be later this year), there is now a lot of clarity about what consumers and businesses can do to benefit from the new rules.
Difference between LIT and DRIV ETF
After the act was passed, one exchange-traded fund (ETF) to think about is the Global X Lithium & Battery Tech ETF (LIT).
LIT aims to offer investment outcomes that roughly match the price and yield performance of the Solactive Global Lithium Index, an index created to gauge the broad-based equity market performance of international businesses engaged in the lithium sector.
The table below shows the LIT and DRIV ETF comparison analysis.
| Parameters | LIT | DRIV |
|---|---|---|
| Meaning | Lithium & Battery Tech ETF | Global X Autonomous & Electric Vehicles ETF |
| Description | LIT aims to offer investment outcomes that roughly match the price and yield performance of the Solactive Global Lithium Index, an index created to gauge the broad-based equity market performance of international businesses engaged in the lithium sector. | DRIV seeks to invest in businesses that work on the software and hardware for autonomous vehicles, EVs, EV components like lithium batteries, and essential EV materials like lithium and cobalt. Before fees, it returns the price and yield performance of the Solactive Autonomous & Electric Vehicles Index. |
| High growth potential | The rise of electric vehicles (EVs), renewable energy storage, and mobile devices depend on lithium battery technology. | EV registrations climbed by more than 40% globally in 2020, but fewer than 5% of new cars were sold; this shows that there is still a large market for EV adoption. |
| Advancing clean technologies | EVs have zero direct emissions, hence their widespread adoption could lead to a decrease in greenhouse gas emissions and an improvement in urban air quality. | Greater EV adoption could lead to lower greenhouse gas emissions and better urban air quality because EVs have no direct emissions. Roadway safety may increase as autonomous driving technology develops further. |
| Unrestricted strategy | LIT invests across traditional industry and regional boundaries in businesses involved in the entire lithium cycle, including mining, refinement, and battery production. | This subject is more expansive than any one business. Accordingly, DRIV makes investments with global exposure across many sectors and industries. |
Broad, Renewable Energy in 1 ETF
Options for investing in renewable energy abound in exchange-traded funds (ETFs).
While investors have the option of choosing funds that concentrate on particular sources, like wind or solar, they can also receive broad exposure in one fund, the Global X Renewable Energy Producers ETF (RNRG).
The Indxx YieldCo & Renewable Energy Income Index’s price and yield performance are being tracked by RNRG.
The underlying index is created to offer exposure to publicly traded businesses that generate energy from renewable sources, such as wind, solar, hydroelectricity, geothermal energy, and biofuels (including publicly traded companies that are formed to own operating assets that produce defined cash flows).
In conclusion, RNRG offers investors the following:
- High growth potential:
RNRG gives investors access to businesses that are at the forefront of a structural change in the way that the world produces energy.
- Exposure to renewables:
The ETF is a focused, thematic investment in suppliers of renewable energy.
- A thoughtful strategy:
The Glass Lewis proxy voting criteria for environmental, social, and governance (ESG) are adopted by RNRG.
Benefits of Inflation Reduction Act.
Enables Medicare to bargain for reduced drug costs:
The Inflation Reduction Act gives Medicare the authority to bargain with pharmaceutical corporations so that they can no longer take advantage of Americans, who currently pay two to three times as much for the same pharmaceuticals as individuals in other wealthy OECCD countries (OECD).
It has been illegal for the federal government to bargain medicine costs with pharmaceutical firms for almost 20 years.
Lowers the cost of health care:
13 million people will now be able to purchase health insurance thanks to the Inflation Reduction Act’s extension of increased Affordable Care Act (ACA) marketplace subsidies until 2025.
An average enrollee will save around $800 on premiums annually. The Affordable Care Act (ACA) is responsible for the record-low uninsured rate, and the subsidy extension will keep 3 million individuals from losing their insurance.
Cracks down on the greed of Big Pharma:
Drug manufacturers are prohibited from raising Medicare prices above the rate of inflation by the Inflation Reduction Act. If drug firms raise prices over inflation, the idea mandates that they refund the difference.
Lessens carbon pollution:
With the passage of this bill, emissions are anticipated to be 40 percent below peak levels by 2030, making the nation’s climate objective of reducing pollution to 50% of peak levels by the end of the decade attainable.
Brings down energy expenses:
The measure assists households in switching to less expensive electricity for home heating, cooking, and vehicles—helping Americans reduce their utility costs and avoid the petrol station—despite the fact that fossil fuels are the cause of inflation.
Even households that choose not to make the move will see cheaper electricity and natural gas rates, which will result in annual savings of $500 for the average household. Over the next ten years, total spending on oil might decrease by almost 25 percent.
Tax credits for the purchase of clean automobiles produced in North America would also be offered to middle-class and working-class consumers under the proposed legislation.
Jobs for Americans:
By constructing new factories, renovating existing ones, requiring high pay, and requiring apprenticeship training for businesses employing clean energy tax credits, the Inflation Reduction Act creates a new clean energy manufacturing industry.
The legislation will increase American production of batteries, solar panels, wind turbines, and other clean energy products, putting the US in a competitive position in the global clean energy market and generating millions of clean energy jobs.
Invests in areas where environmental and health risks are most severe:
Environmental and Climate Justice Block Grants totaling $3 billion will be available to communities that face long-standing, hazardous environmental and health hazards. These grants will help reduce pollution and enhance public health. The bill will allocate a total of $60 billion to environmental justice priorities.
Creates a more equitable tax system:
The legislation imposes a 15 percent minimum tax on those firms with yearly profits of at least $1 billion in an effort to combat the issue of corporate tax dodging. Additionally, it imposes a 1% tax on businesses that distribute their profits to affluent shareholders rather than investing in their operations or personnel.
Combats inflation while reducing the deficit:
The Inflation Reduction Act lowers demand by enacting more equitable taxes, boosts supply by funding manufacturing and clean energy projects, and lowers the price of energy, healthcare, and prescription pharmaceuticals.
The plan is completely funded and will significantly reduce the deficit, in contrast to the $1.9 trillion tax measure proposed by the Republicans in 2017.
Punishes affluent tax evaders:
The percentage of audited American households earning $5 million or more annually drastically decreased as a result of insufficient enforcement budget, falling to only 2 percent in 2019 from a rate of more than 16 percent in 2010. This bill’s new financing will contribute to more equitable tax law enforcement.
Conclusion.
Lithium prices have increased recently, and output has increased significantly as well. New reserves did not initially cause a rise in production. Thus, here we go with the Inflation reduction act of 2022 and also count the lithium crisis. And pass through some benefits of the Inflation Reduction Act of 2022.
FAQs.
Which Countries will Profit Most from the Inflation Reduction Act?
Given its reputation as a trustworthy trade partner of the United States and a nation with solid property rights, Australia—currently the world’s largest producer of lithium—may stand to gain the most from the Inflation Reduction Act, at least in the near future. In the meanwhile, as of 2021, the U. S.
Why is the Manufacturing of Lithium Increasing so Quickly?
Lithium prices have increased recently, and output has increased significantly as well. In 2008, known reserves started to rise. New reserves did not initially cause a surge in production. That started to shift about 2016, which was also the time of the price increase. The production has significantly increased since 2016.
Will the United States Grow to be a Significant Lithium Importer?
Lithium is now produced in relatively limited quantities in the United States, making it a significant importer of this mineral. Although there is a chance for change, it will mostly depend on how technology, government regulations, and public opinion evolve.
Will the Inflation Reduction Act be impacted by Popular Opposition to Lithium Mining?
The current state of the world’s lithium market is unknown. The extent to which the public’s opposition to mining increases may have a significant impact on the Inflation Reduction Act goals that the United States can achieve.
What does the Energy Storage Inflation Reduction Act Entail?
Energy storage in the US will soon be eligible for the tax credit that assisted in bringing solar and wind power into the mainstream. The Inflation Reduction Act gives a tax credit to standalone energy storage that equals 30% of the investment’s cost.
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