Implications of the US tax credit proposal on Australia’s electric vehicle industry

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The US Department of the Treasury, in conjunction with the Internal Revenue Service, has introduced a groundbreaking proposal into the US electric vehicle (EV) market – one which will likely have global ramifications.

Their 'new clean vehicle credit' proposal under the Inflation Reduction Act would offer a US$3,750 tax credit to American taxpayers purchasing EVs, provided that a substantial portion of the EV battery's essential minerals originates or undergoes processing in the United States, countries in free-trade agreements with the US, or countries with crucial mineral agreements – Australia is among these countries.

Accessing the tax credits could be difficult or impossible for many US car buyers if any of the essential minerals within the EV battery have been processed outside the US, or in a country that does not meet the afore mentioned criteria.

The New Clean Vehicle Credit has the potential to significantly impact the global critical minerals value chain as, for example, EV components where lithium extracted in Australia, but processed by a foreign entity of concern (FEOC), may be ineligible for the tax credit. With annual Australian exports of copper, alumina, lithium and nickel expected to reach A$49b by 2027-28 according to Reuters, this development has the potential to re-configure the geography of current critical mineral processing operations. This could be an opportunity for Australian value-adding in mining, as well as to grow our battery market. 

However, with differing opinions on how a FEOC will be defined, there’s still a degree of uncertainty until final definition is released towards year-end.

Australian Government support will be instrumental in leveraging the opportunity this tax credit may present – with investment into building critical mineral processing and refining capability domestically instrumental to building critical mineral processing infrastructure and growing a domestic EV battery sector. Developing this onshore capability will not only diversify and disaggregate the global supply of critical minerals and EV components, but it will also support Australia’s agenda to build onshore sovereign manufacturing capability and increase participation in the global transition to net zero. For Australia, this could mean more on shore value adding, increased innovation, jobs of the future, economic growth and prosperity.

The Federal Government has already committed to support the Manufacturing sector with various programs, such as the National Reconstruction Fund, which provides A$1b for value-adding in resources, and the Industry Growth Program, which offers grants for projects across seven priority sectors, including resources technology and critical minerals processing. These initiatives support the Government’s vision to position Australia as a world leader in critical mineral processing and advanced manufacturing, and support the sector’s longevity in a dynamic, changing landscape from an innovation incentives stand-point.

Ahead on building onshore capability, Australian mining companies could consider strategic partnerships with key trading partners for processing, ensuring their domestically mined critical minerals meet the specified requirements to attract the tax credit.

This underscores the importance of reviewing and reshaping Australia’s trade policies. By reassessing trade policies, Australia can be strategically positioned to meet the growing demand for critical minerals by tapping into its significant resources and leveraging innovation incentives introduced to strengthen domestic processing capabilities, aligning with the Australian Federal Government’s sovereign manufacturing objectives.  

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