Energy Transition

The Carrot and The Stick: US vs European Approaches to the Battery Value Chain

While the US is incentivizing battery production at home, Europe is focused on ensuring origin and digital product passports. In order to remain competitive and attract investment into the region, Europe may need to adapt its approach.

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By Paul Betts
Published March 15, 2023 | 3 min read
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Key Points

  • Both Europe and the US want to see more battery production, but they have very different approaches to establishing the value chain.
  • Europe is pushing regulation on rules of origin and digital product passports which levy additional taxes on those companies that don’t comply.
  • The US is incentivizing both production and recycling with tax credits and government grants.
  • The carrot and the stick approaches both have their pros and cons, but globally, a balance may need to be achieved.

Electric vehicles (EVs) would appear to sit firmly in the “green” category, helping to reduce emissions by getting petrol and diesel cars off the roads. But as understanding of carbon emissions and levels of corporate responsibility evolve, what at first appears to be a simple case becomes much more complex.

For EVs, the complexity lies in the battery value chain. Once on the road, EVs have obvious benefits, but in production, there are questions that must be considered. How and where were they manufactured? How were the critical minerals mined that went into their batteries? Where were those batteries assembled? How much of the battery can be recycled?

In an effort to address the whole battery value chain, there are several important changes to legislation in Europe and the US under development. However, each jurisdiction is taking a very different approach.


Hard rules for battery metals in Europe

By 2027, the “Rules of Origin” will require European automakers to demonstrate that at least 55% of the inputs going into the manufacture of cars are sourced from within the EU. Vehicles that fall below this level be subject to a further 10% tariff at sale. 

This will present several challenges for European OEMs. The battery is the most valuable component of an EV and Europe is not a leading producer of battery metals. Sourcing European inputs will be difficult and may push up costs. However, for those battery metal producers that are in Europe, this will give the sector a major boost.

The EU Commission is not unreasonable about the current scarcity of battery metals within Europe. It has agreed to waive the 10% levy fees if battery metals are sourced elsewhere, but are processed into cathode active battery materials (CAM), or their precursor materials (pCAM), within Europe.


A digital passport for batteries

In addition to the “Rules of Origin”, the EU is also going to require that by January 2026, every industrial and traction battery has an individual digital file – a battery passport. This passport will contain information ranging from technical data for economic operators, to user data such as how much life is left in the battery, to sustainability data about how it was processed and its recycled content. Buyers will be able to ascertain whether the battery facilitates repairs and how it will be processes at the end of its life.

The passport is part of the European Green Deal, which aims to develop digital product passports (DPP) for many sectors and products in a bid to help efficiently provide routes to decarbonization and circularity. Compliance with these requirements will initially be quite onerous for industry, but Circulor is a company that has been established to help companies collate and manage this data and information gathering.


How the US is incentivizing change

The focus in Europe has been on regulating the development of the battery ecosystem to ensure it is effective in reducing carbon emissions. But the US is taking a different approach. It has implemented measures through the Inflation Reduction Act to incentivize and expedite the development of this sector.


The government is offering:

1) tax credits of up to US$35kWh to companies that produced battery cells, battery packs  and electrode active materials within the US

2) new clean vehicle credits of $7.5k per vehicle depending on the value of components manufactured within the US and depending on whether critical battery metals are sourced from within the US states or any FTA-partnering country 

These measures are boosting the sector within the US and also having a significant influence on the demand for battery metals from countries which qualify as an FTA partner.

Whether in Europe or the US, once metals are secured within a country, recycling will be essential to ensure they are retained and not lost to other countries. The US has been progressive on this front, providing generous government grants of up to US$500m to Ascend Technologies and Cirba, two local recycling companies. 

The differences in approach between the US and Europe is leading to a flight of capital and battery capacity away from Europe. Volkswagen recently announced plans to pause its development of battery capacity in Europe and refocus its efforts in the US where it is expected to benefit from US$10bn in tax credits. Jaguar and Tata have also called upon the UK Government to grant £500m UK subsidies to build a battery factor.


Carrot, stick, or a bit of both?

Although the US appears to be a more attractive jurisdiction for companies operating along the battery value chain, the question as to whether the carrot or the stick encourages the right behaviors in the long term is a contentious one. 

Incentives and subsidies in place in the US will likely support profitability of companies and expedite the development of the US battery ecosystem. But if regulatory bodies do not monitor the carbon emissions across the full battery value chain, the potential outcome is that the reduction in carbon emissions within the US is more than offset by the increased carbon intensity arising further up the value chain outside of the US.

In Europe, the regulation is aiming to curb this danger, but there’s a risk of rising costs in the shorter term that may impact sector development.

As in so many things, a balance may have to be found between incentives that grow the battery value chain and the regulations and policies that ensure that it develops in the right way.

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