By Troy Stangarone
Act helps expand market for clean energy products
Following the adoption of the Inflation Reduction Act (IRA) in August 2022, attention focused on how the legislation discriminated against the sale of Korean EVs. However, more than a year later, it is clear that Korea has benefited significantly from the IRA.
Much of the concern about the IRA initially focused on the law’s requirement that EVs be produced in North America in order to be eligible for the $7,500 clean vehicle tax credit.
The assembly provision deserves criticism while changes are welcome that would allow vehicles to be assembled outside of North America as long as that assembly does not take place within “foreign entities of concern” as defined within the law.
However, since the law was passed, the Biden administration has worked with Korea and other countries to lessen the impact of some of the IRA’s discriminatory provisions. The most critical was the regulatory interpretation that any leased EV would be classified as a commercial vehicle. Under the act, those vehicles are eligible for the clean vehicle tax credit without being assembled in North America. They are also exempt from the legal requirements mandating compliance with critical mineral or battery component content. The results have been clear.
Through November 2023, Hyundai and Kia’s combined EV sales in the United States placed them only behind Tesla in that market. Strong December sales pushed Ford and GM past Hyundai and Kia. However, because Hyundai and Kia do not separate EV and internal combustion engine sales data for their Santa Fe, Tucsan and Kona models, analysts expect that together the two companies topped all automakers in the United States other than Tesla.
All told, Hyundai sold 46,917 vehicles in its IONIQ line, up 104 percent from 2022. Kia sold nearly 20,000 of its EV6 and EV9 models combined, but analysts estimate Kia sold over 30,000 EVs once models that have both EV and internal combustion engine options are included.
The regulatory change played an important, if not the sole role, in the sales increases. Hyundai indicates that leases of EVs rose from 2 percent at the beginning of 2023 to 30 percent of their sales by November.
With Kia set to begin production of the EV9 at its plant in West Point, Georgia in Q2 of this year and the joint Hyundai and Kia EV plant outside Savanah, Georgia set to come online in Q4, there is significant potential for the growth of Korean EV sales this year as well.
The benefits of the IRA, however, go beyond incentivizing the sale of EVs with the clean vehicle tax credit. Of the vehicles currently eligible for the full or partial clean vehicle tax credit around half use Korean batteries from LG Energy Solution, SK On or Samsung SDI. Exports of EV batteries from Korea to the United States were up 27 percent through November 2023. The United States is now Korea’s most important export market for EV batteries.
In addition to increased EV battery exports, Korean firms have also invested significantly in EV battery production in the United States. The U.S. government is supporting that investment with a combined $11.7 billion in loans since November 2022.
With China expanding sales of both EVs and EV batteries outside of its domestic market, U.S. tax credits and subsidies will play an important role in maintaining the competitiveness of Korean EV and EV battery producers.
The IRA, however, is about more than just EVs and EV batteries. Tax credits for solar panels are supporting increased investment by Hanwha Q Cells in new solar panel production in the United States. Q Cells estimates that the tax credits could be worth $875 million per year to the firm.
The production of green hydrogen is another area where Korean firms may benefit from U.S. production and investment tax credits under the act.
As with many pieces of legislation the IRA has flaws. In addition to changing the EV assembly requirements, the law would benefit from an amendment to EV batteries’ origin requirements for critical minerals and components that established standards for how the minerals are mined and processed while removing the current standard of being from a U.S. FTA partner.
Despite the shortcomings of the IRA, it is providing significant benefits to Korea by expanding the market for clean energy products. Korean firms are leaders in many of these industries and now have access to tax credits to support sales and a combination of tax credits and loans to support production. In addition, as the world increasingly focuses on climate change, this support will help Korean firms more quickly transition to clean energy products. The initial concerns about the law were well-founded, but it has become clear with time that Korea has been a significant net beneficiary of the IRA.
Troy Stangarone (firstname.lastname@example.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.