Friendshoring the Lithium-Ion Battery Supply Chain

WILLIAM ALAN REINSCH, MEREDITH BROADBENT, THIBAULT DENAMIEL & ELIAS SHAMMAS

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Introduction

Lithium-ion batteries are among the most critical industrial items necessary to achieve the transition to lower carbon emissions worldwide. Essential to electric vehicles (EVs) and the effective delivery of solar and wind power throughout the electric grid, these batteries also charge a majority of consumer electronics products.1 While the supply chain for batteries is dispersed throughout the globe, the mining and processing of key minerals and materials is concentrated in just a few countries, with China dominating.2 As changing trade relationships, sanctions, and other geopolitical disruptions ripple through the global economy, the dispersion of supply chains and concentration of key inputs constitutes a significant vulnerability for maintaining and growing production in this key manufacturing sector.

The sourcing and processing challenges in the lithium-ion battery sector are formidable. As U.S industries strive to grow in this sector, they face complexities surrounding battery supply chains that have been generated by overlapping—and at times incompatible—government policies that aim to: (1) protect national security, (2) facilitate the green transition, and (3) improve U.S. economic competitiveness while re-shoring domestic industrial capabilities. Policies designed to address these serious and varied global challenges have at once offered generous market stimulating incentives while introducing non-market economic headwinds that may eventually threaten the survival of U.S. supply chains for lithium-ion batteries.

The Biden administration has embraced the vision of achieving an economy that emits less carbon by providing demand-inducing subsidies for EVs and lithium-ion batteries, which are the heart of these cars.3 Adding difficulty to achieving climate goals is the dominant role played by China in this sector, coupled with a bipartisan consensus in the United States on the need to reduce economic dependence on China.

The business community, for its part, is engaged in extensive risk reassessment with respect to doing business in and with China to ensure greater resiliency in their supply chains. Depending on the current level of investment, the business model, and the structure of individual supply chains, risk reassessment can lead U.S. companies to take the decision to sever ties with China. More often, companies are identifying possible chokepoints for inputs and embarking on a quest for redundant sources of supply to backstop against future export restrictions and trade sanctions should economic relations with China further deteriorate.

A profound shift in trade, economic, climate, and national security policy is underway. The Biden administration has followed the European Union in articulating its goal as “de-risking” rather than decoupling from China, but as a practical matter, policies still under development have so far been disjointed and difficult for industry to follow.5 These policies, combined with tough rhetoric by various government officials and members of Congress who propose even more draconian measures to require local sourcing, have injected uncertainty into the commercial decisionmaking governing U.S. manufacturing capabilities. In the end, government measures to restrict commerce with China, in advance of alternative sources of supply of key inputs coming online, threaten to derail this range of overlapping policy objectives. In short, the United States is pursuing three conflicting goals: accelerating the green transition, reshoring production capabilities in critical sectors, and diversifying away from China in these key areas. Efforts to achieve the last two goals compromise the first.

Overview

The Biden administration and Congress have undertaken a full suite of industrial policy measures that are set to skyrocket demand for lithium-ion batteries, especially when it comes to EVs. The Infrastructure Investments and Jobs Act (IIJA) set up funding meant to create a “Made-in-America” EV network of 500,000 chargers.6 The law invests $7.5 billion in EV charging. The Inflation Reduction Act (IRA)’s tax incentives, which provide billions in tax benefits for manufacturers and consumers of EV batteries, is making lithium-ion technology more in demand than ever. Certain tax credit qualifications in the IRA include domestic content requirements for batteries and battery materials, including those used to support clean energy project deployment.

This is the first of three papers examining the lithium-ion battery supply chain and prospects for bringing more production on shore. This paper outlines the basic makeup of a lithium-ion battery and some of the complexities surrounding the purifying processes for several different scarce critical mineral inputs. In addition, it describes the role that the United States plays in the global sourcing of key minerals now and in the future by examining several trends expected to impact the market going forward. Lastly, this paper lays out what actions the Biden administration and Congress have undertaken to date to improve the security of critical mineral supply chains and proposes some recommendations to build upon that foundation.

Currently, the processing of battery materials is concentrated in a few nations outside of the United States, representing a daunting challenge for building resiliency in an environment of heightened geopolitical tension. According to the U.S. Department of the Interior, “The clean energy transition will necessitate an overall 400–600 percent increase in global demand for key critical minerals like lithium, graphite, cobalt and nickel and for some minerals the increase will be many times higher.”8 U.S. reliance on Chinese extraction, refining, and processing of critical minerals creates a serious vulnerability.

Several stages of the lithium-ion battery supply chain need to be considered to understand how the United States can reach its goal of diversifying its supply of battery inputs while keeping the green transition moving. To reduce critical dependencies and build stronger global supply chains in this sector, the administration should consider balancing domestic production incentives with modernized trade relationships to best ensure that U.S. firms maintain an adequate supply of these key inputs.

The Makeup of a Lithium-Ion Battery

The basic makeup of a lithium-ion battery consists of three main components: multiple lithium-ion cells, the wires connecting these cells, and a battery management system (BMS) to monitor the functioning and temperature of the battery. In turn, each lithium-ion cell is individually made up of four main components: the cathode, the anode, an electrolyte, and a separator. The anode and cathode components store the lithium.9 What creates electricity from a lithium-ion battery is the movement of the lithium between the anode to the cathode components, carried by the electrolyte via the separator, creating free electrons and thus a charge that flows through the device being powered.10 Each of these components are made of several constituent materials and chemicals that are critical to enhancing the performance of the lithium-ion battery, which will be discussed in more detail in subsequent papers.

Cathode

Batteries are composed of positive and negative electrodes to enable the creation of electrons to create electrical current. In a battery, the cathode is the positive electrode. Cathode active materials (CAMs), which define the output and application of the batteries, are generally composed of metal oxides.11 The most common metal oxides that make up CAMs are lithium cobalt oxide, lithium manganese oxide, lithium iron phosphate, and lithium nickel manganese cobalt oxide.12 Different cathode materials contain varying amounts of lithium: the higher the lithium content, the larger the battery capacity, as lithium storage has a direct impact on the battery’s ability to run.

Anode

While the cathode is the positive electrode enabling the flow of electrons, the anode is the negative electrode. Much like cathodes, anodes require active materials to function. Anode active materials (AAMs) are generally made from carbon-based materials such as graphite, silicon, or a combination of both. Graphite is the most commonly used because of its high electrical conductivity, lower cost, and stable structure, while silicon possesses higher energy density (the amount of energy stored in a given substance per unit volume) but presents challenges due to higher volume expansion and shorter life cycles.

Electrolyte

A battery electrolyte is a solution inside batteries, the consistency and makeup of which varies based on the type of battery.15 However, electrolytes ultimately are used for the same purpose: they transport positively charged ions between the cathode and the anode—enabling the free flow of electrons and creating an electrical charge. The chemical in question allows the electrical charge to pass between the cathode and anode terminals and puts the chemicals required for a reaction in contact with the terminals, which converts stored energy into useful electrical energy. The most commonly used electrolyte in lithium-ion batteries is a lithium salt solution.

Separator

Separators are placed in lithium-ion batteries between the anode and cathode to avoid a short circuit and facilitate a lithium-ion cell’s stability and safety. Because separators are not part of the reactions that produce the flow of electricity mentioned above, they have to be chemically stable relative to the electrolyte and electrode materials. Materials in a separator include nonwoven fabrics consisting of “a manufactured sheet, web, or mat of directionally or randomly oriented fibers.”

Concentration and Purification of the Materials

Several critical minerals and raw materials are key to the lithium-ion battery supply chain. This paper highlights minerals that are currently used in batteries, but there may be new battery chemistries and types that could change what critical minerals and raw materials are required for renewable power generation. As stated by the Congressional Research Service, processes of obtaining permits, acquiring land and capital, and other necessary steps can vary considerably and may take years.18 The Government Accountability Office assessed that the amount of time needed simply to reach the approval stage “ranged from about 1 month to over 11 years and averaged approximately 2 years.”

Critical minerals key to lithium-ion battery manufacturing require rigorous, lengthy technical processes to avoid negative spillover effects on the environment and workers’ health. For instance, cobalt mining has come under scrutiny due to the issue of child labor as well as poor safety standards: a report from the Organization for Economic Cooperation and Development notes that a mine owned by the Kamoto Copper Company in the Democratic Republic of Congo collapsed, killing an estimated 36 workers.20 Setting up and operating these processes is therefore a difficult task, made all the more challenging by two features. First, demand for these minerals and materials is set to increase significantly. A report by the International Energy Agency found that, in order to meet the goals outlined in the Paris Agreement, demand for nickel, cobalt, and graphite is expected to grow by about 20 times, while lithium demand is expected to grow to 40 times its current level.21 Second, the movement to diversify away from China, which extracts a large amount of these minerals and materials and processes an even larger share, will require the significant retooling of current processing activities.