The US must close an Inflation Reduction Act loophole that may benefit Indonesian nickel 

The U.S. Inflation Reduction Act (IRA) established new incentives for “clean” electric vehicles (EVs) to source minerals from the United States and free trade agreement countries, like Australia and Canada. But newly finalized U.S. government rules mean other countries — such as Indonesia, the world’s largest nickel producer with significant Chinese investment, weaker labour protections, and lower environmental standards — could also benefit. 

Specifically, the IRA includes a US$3,750 critical minerals tax credit for U.S. taxpayers who purchase qualifying EVs meeting certain content requirements. To be eligible for this tax credit, the content of the value of the battery’s critical minerals from the United States and free trade agreement countries must be at least 40% for EVs placed in service in 2023. This critical mineral content threshold rises to 50% for cars that hit the road in 2024 and increases by 10 percentage points every year until 80% for vehicles placed into service in 2027 and onwards. The battery also can’t contain any minerals from “foreign entities of concern.”  

Earlier this month, the U.S. Department of Energy released its final rule on the foreign entity of concern definition, and the U.S. Department of the Treasury released its final rule on the tax credit. While the Department of Energy rule contains a loophole in its definition of a foreign entity of concern, the Department of the Treasury rule has a loophole in its definition of a free trade agreement country. Under the current Treasury rule, minerals produced in countries without comprehensive U.S. free trade deals could be eligible to contribute to the content requirements for the critical minerals tax credit. 

The text of the IRA states that “any country with which the United States has a free trade agreement in effect” is an eligible source to contribute to the content requirements of the critical minerals tax credit. West Virginia U.S. Senator Joe Manchin, a Democrat and the tax credit’s key architect, has reiterated that a “free trade agreement” means a comprehensive free trade agreement, “in which each [signatory country] removes tariff and other restrictions on ‘substantially’ all trade between the parties, not just a mineral here or a mineral there.” 

Yet, the Treasury Department has expanded the free trade agreement definition to include countries with which the U.S. has signed “critical minerals agreements,” like Japan, in order “to expand the incentives for taxpayers to purchase new clean vehicles.” The White House has also said that it is negotiating critical minerals agreements with the European Union and the United Kingdom and that it seeks to begin negotiations with Indonesia. Argentina and the Philippines are also reportedly interested in pursuing critical minerals agreements. If a critical minerals agreement is signed with Indonesia, for example, a U.S. EV would not only be eligible but also benefit tax-wise by containing minerals produced by Chinese-connected entities in Indonesia, like the Singaporean subsidiary of China’s Zhejiang Huayou Cobalt. 

The U.S. government must close this loophole by restricting the definition of free trade agreement countries to those that have signed comprehensive free trade agreements with the U.S. Alternatively, instead of updating the existing rule, the White House could simply pause negotiations of new critical minerals agreements and rescind its critical minerals agreement with Japan, although that would prove damaging diplomatically. Nonetheless, the original intent of the IRA was to bestow advantages to free trade agreement countries with comprehensive free trade agreements, not those with critical minerals agreements. 

In conclusion, the critical minerals tax credit was intended to limit the eligible foreign sources of critical minerals to countries with comprehensive free trade agreements. However, the final Treasury rule on the Section 30D tax credit allows EVs with batteries containing minerals produced in countries with critical minerals agreements — possibly including Indonesian-origin, Chinese-produced minerals — to benefit. Thus, the final rule ignores the original intent of the IRA, as Manchin has noted, and opens the opportunity for countries with significant Chinese investment and much weaker labour and environmental standards to benefit from the critical minerals tax credit as a bipartisan group of U.S. senators has warned. 

Ultimately, the final Treasury rule undermines the purpose of the tax credit, which is to incentivize the development of reliable and sustainable mineral supply chains within America. To fulfill the law’s original intent, the U.S. government should close this loophole and specify that the only eligible foreign sources that can contribute to the content requirements for the critical minerals tax credit are countries with comprehensive U.S. free trade agreements. 

Gregory Wischer is the founder and principal of Dei Gratia Minerals, a Washington, D.C.–based critical minerals consulting firm. The firm provides research support on critical minerals issues to policy think tanks and Greg regularly briefs U.S. government officials on related critical mineral supply chain issues.