The Cost Of Battery Production Tax Credits Provided In The IRA

The Inflation Reduction Act is a landmark piece of legislation that directs more than $1 trillion in subsidies and incentives toward clean energy production. It includes tax credits for buyers of new clean vehicles, production tax credits for clean energy like wind and solar, and more production tax credits for advanced energy technologies like batteries. The U.S. government has been waving around big financial incentives to lure manufacturing to the country, and many producers have taken notice.

While some battery makers were already well on their way to setting up new U.S. plants, others are now rethinking their location decisions. For instance, Tesla recently announced it will pause its plans to build a battery cell plant in Germany and forgo $1.3 billion of state aid there, and instead build one in Texas. Recent statements from electric vehicle and battery makers that they are expecting big government payouts thanks to the IRA raise the question: Just how much will the battery production credits cost American taxpayers?

Under Section 13502, “Advanced Manufacturing Production Credit,” the IRA includes production credits for battery cells and battery modules produced in the United States. The Congressional Budget Office’s cost estimate of the provision over the 2022-2031 fiscal years was $30.6 billion.

The credit can be monetized so that a producer is eligible for a directly payment from Treasury. (Section 13502 includes other production credits, but here I focus on the production credits for battery cell capacity and battery module capacity.)

The amount of the credit depends on the amount of energy the battery produces, in terms of kilowatt hours. As a Congressional Research Service report notes, battery cells can qualify for a credit of $35 per kilowatt hour of capacity, and battery modules for a credit of $10 per kilowatt of capacity, or $45 in the case of a battery module that does not use battery cells.

Estimating the potential cost of these production credits is speculative because of large uncertainties: How many eligible EV batteries will be produced in the United States? How many EVs will be sold in the U.S.? An Argonne National Labs report includes estimates of announced battery plant capacity in North America for plug-in EVs and the estimated U.S. share of that capacity. Taking those figures, and assuming the battery plants maintain at least 75% capacity utilization, we can come up with annual estimates for the production credits.

Applying the full $45 production credit across the board, the total value of the production credits over calendar years 2023 to 2032 is approximately $196.5 billion. Applying the $10 and $35 production credits, the value drops to $43.7 billion and $152.8 billion, respectively. Currently, most cell production is outside of North America and U.S. battery module assembly plants would only qualify for the $10 production credit until the full cell production is moved to the country. (My figures take into account the IRA’s phase out of the production credits: 100% from 2023-2029, 75% in 2030, 50% in 2031 and 25% in 2032.)

Despite the current numbers, the recent announcements on the surge of new battery cell plants across the country suggests more and more battery producers will be eligible for the higher credits in the coming years. Perhaps more than what was considered when the CBO conducted their cost estimates.

My figures also assume battery makers can get the minerals they need to make the batteries: If they cannot, then production levels and production credits would be less. On the other hand, if battery capacity were to increase beyond the ANL projections, then the production credits would be greater.

Finally, these production credits appear to be actual payments and not just tax write offs. This would suggest that even a company that does not pay taxes could still receive these monetized production credits.

CBO’s task of scoring massive pieces of legislation like the IRA is often next to impossible when so little information is available. But the difference between CBO’s estimates of $30.6 billion and estimates based on more recent information of up to $196.5 billion is large enough to warrant a deeper dive by policymakers. Treasury will be writing important guidelines in the coming months that will define eligibility. My hope is that these new figures spur discussion around the costs of the “Advanced Manufacturing Production Credit” in the IRA.