Final Project

Author

Jenny Park

Sustainable Finance Final Project

by Jenny Park

Executive Summary

  • The resources for EV are highly concentrated in a very few countries with most mines in developing economies, leading to issues regarding rights over Native lands and child workers.

  • China’s processing and refining capacity accounts more than half of the world’s lithium, cobalt, and graphite capacity, making decoupling from China very difficult.

  • There are very few countries that both have the processing capabilities and technologies and have a FTA with the United States, making an already complicated process even more difficult for private companies.

Introduction

The Inflation Reduction At of 2022 (IRA) was signed into law on August 16, 2022, aiming to catalyze investments in domestic manufacturing capacity, encourage procurement of critical supplies domestically or from free-trade partners, and jump-start R&D and commercialization of leading-edge technologies. The IRA includes tax credits and incentives for electric vehicles. In order to qualify, certain percentage of EV assembly and battery manufacturing has to take place in North America, with percentage rising each year. For critical minerals, an increasing amount has to be sourced or process from either the United States or a country with which the United States has a free trade agreement with. For battery components, they have to eventually be sourced from only North America. For both the components and critical minerals, the EV must soon not have any content at all coming from “foreign entities of concern,” which could include China. This paper then attempts to map where EV battery manufacturing firms can source and process its minerals. The findings show that the current extraction/processing is unsustainable and unfeasible, and therefore requires major investments into battery recycling.

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The resources for EV are highly concentrated in a very few countries as exemplified by Graph 1, with most mines in developing economies.

These countries happen to fall in emerging economies, and mining of the minerals used in their batteries pose environmental and social concerns. The extraction of minerals for batteries is causing environmental and social issues in emerging economies. Bolivia and Chile, which are rich in lithium, are facing water scarcity as indigenous farmers and miners compete for the resource. To extract lithium, large amounts of groundwater are required, with nearly 2 million liters of water needed to produce a single ton. In Chile, mining activities, including lithium extraction, have already consumed 65% of the water, leading to depletion of groundwater and soil contamination. Consequently, local communities have been forced to leave their ancestral homes. Furthermore, the Democratic Republic of Congo is the primary source of cobalt, with approximately 20% originating from artisanal mines. It has been estimated that 40,000 children work in these mines, which are hazardous and unregulated.

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Graph 2 shows China’s processing and refining capacity accounts more than half of the world’s lithium, cobalt, and rare earth (including graphite) capacity.

However, under the IRA, EVs that contain components from “foreign entities of concern” including China would disqualify consumers from federal tax credits. While there definitely is a need for diversification in the critical minerals supply chain, due to the very high concentration, China decoupling cannot happen overnight. Furthermore, as exemplified by Graph 1 and Graph 2, China dominates in both graphite mining and processing capabilities - and is the only country currently mining such material in large quantities. Additionally, while there are initiatives and legislation to extract critical minerals in the United States, not only is developing mines very costly, but also is very time-consuming. Therefore, the question of feasibility over meeting the provisions of IRA comes into question.

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Map 1 shows there are very few countries that both have the processing capabilities and technologies and have a FTA with the United States.

This is a problem because Manufacturing EVs and their batteries is a complex process involving several stages of production that can each take place in different countries, leading to companies facing difficulty in compliance and due diligence matters when trying to implement changes required in the IRA. With such limitations that are imposed by the IRA, companies have floated the idea of manufacturing abroad and cutting the price down by USD 7500, making their EVs as competitive in price as EVs that qualify for IRA tax incentives. If companies end up deciding with manufacturing abroad, then it may end up in more emission and damage. All the continents are showing efforts to ramp up their mining capacities to extract critical minerals.

Conclusion

Through the semester, we focused on what it means to measure “ESG” and “sustainability”. Although there is no doubt acceleration towards electric vehicles and less dependence on fossil fuel were necessary, there needs to be a holistic approach. For example, potential mining sites in United States tend to be Native American territory, leading to another stakeholder conflict - and potential infringement on human rights as in the case of Chile. Furthermore, the transition goes beyond the critical minerals and manufacturing. There needs to be more investment into energy storage, EV charging infrastructure, and R&D into battery recycling and sodium-ion battery.