U.S. Department of Treasury Releases Final Ruling on Section 45X

Critical Questions by Gracelin Baskaran and Meredith Schwartz

Published November 6, 2024

The Inflation Reduction Act (IRA) of 2022 introduced a host of new tax credits, grants, and other incentive programs designed to boost domestic manufacturing of clean energy technologies and their components. The Section 45X Advanced Manufacturing Production Tax Credit (PTC) is a key initiative that targets not only the downstream production of technologies like electric vehicle (EV) batteries, solar panels, and wind turbines, but also boosting the upstream critical minerals industry by providing credit to offset high, and sometimes prohibitive, production costs.

The rule proposed in 2023 fell short of providing adequate support to the domestic mining and processing industry. The U.S. Department of Treasury and the International Revenue Service recently published revised final regulations for the 45X Advanced Manufacturing PTC. The final rule includes significant changes to the original guidance which allow domestic mineral producers to derive greater financial benefits from the provision. These benefits are crucial to attracting domestic investment in an industry grappling with intense Chinese competition and volatile market conditions.

Q1: What is Section 45X of the IRA?

A1: The IRA has several provisions aimed at addressing upstream minerals security. This includes the Section 30D New Clean Vehicle Credit, which sets critical mineral sourcing requirements for electric vehicle manufacturers to incentivize friendshoring mineral supply chains, additional grant funding for the Defense Production Act Title III, which funds domestic mineral projects filling national security needs, loans and loan guarantees for expanded Department of Energy Loan Programs Office initiatives, and tax credits in the form of the 48C investment tax credit as well as the 45X PTC.

Section 45X of the IRA provides a 10 percent credit to taxpayers for the costs incurred during the production of critical minerals to specified levels of purity. The credit was intended to expand domestic production of critical mineral components for clean energy technologies. While the credit phases out for all other components including solar, wind, and battery components by 2032, critical mineral projects are not subject to the phaseout, meaning the credit maintains its value in perpetuity. This could be an impactful source of long-term financial support for minerals projects struggling to raise private capital in the face of intense competition from subsidized Chinese producers, falling commodity prices, and permitting delays.

However, there was one major catch. In December 2023, the Department of Treasury released the proposed rule for Section 45X. The rule stated, "direct and indirect material costs [and] any costs related to the extraction or acquisition of raw materials would not be taken into account as production costs." This means the tax credit could only be used by mineral processors, not miners. Even then, the credit was not optimally designed for mineral processors-the costs of attaining raw minerals were not covered under the 45X credit, but these raw materials account for the largest share of costs for mineral processors-upwards of 70 percent for some. Therefore, even eligible mineral processors were not gaining sufficient financial support from the 45X credit given their costs.

Q2: How was the original guidance received by industry and policymakers?

A2: The Department of Treasury ruling was met with intense opposition from private industry and congressional leaders alike. Nearly 200 public comments were submitted to the Federal Register in response to the proposed rules. The National Mining Association (NMA), representing members including General Motors, MP Materials, Perpetua Resources, Rio Tinto, South32, and a host of other mining and automotive companies, submitted public comments that affirmed the exclusion of materials costs and extraction costs in the calculation of 45X credits, "significantly reduced" the impact of the 45X credit. The United Steelworkers union testified to the Senate Committee on Finance in March of 2024, urging the Department of Treasury to incorporate direct and indirect material costs as well as the costs of extraction into the calculation of the credit.

On the congressional side, nine Democratic senators, including key proponents of the IRA, wrote a letter to Secretary of Treasury Janet Yellen in direct response to the department's 45X rulemaking, expressing their displeasure and contending that the rule does not align with congressional intent. The senators wrote that the purpose of Section 45X was to encourage investment in the domestic critical minerals supply chain, and the exclusion of raw materials costs significantly weakened the credit's intended goal.

Domestic mining projects have felt the impact of the 45X restrictions on their operations. Last month, Sibanye Stillwater announced nearly 800 layoffs of workers for its palladium mining operations in Montana. Palladium is set to play a critical role in clean hydrogen energy. Company executives pointed to the project's failure to qualify for the 45X credits as one of the compounding factors to the company's economic troubles. With the price of palladium falling 40 percent in 2023 and Russian competitors operating below acceptable U.S. safety standards, Sibanye Stillwater has not been able to compete. The Montana operation has lost $350 million since the beginning of 2023, as the price of palladium fell below production costs. Section 45X could provide essential subsidies and support for strategic domestic mineral projects struggling to stay profitable under current market conditions.

Q3: What is the Department of Treasury's Final Ruling and how does it differ from previously released guidance?

A3: On Thursday, October 24, the U.S. Department of Treasury announced its final rule related to Section 45X. The final rule provides guidance for a number of outstanding matters in the provision. The most relevant update to the critical minerals industry is a key clarification on the definition of "production costs" as it relates to calculating the credit for critical mineral components. In a reversal from previous guidance, the Department of Treasury ruled that materials costs and extraction costs may be included in calculating credit for critical minerals and electrode active materials. However, the credit can still only be attained once an "eligible component" is produced, meaning only minerals that have been refined to their desired purity will qualify. This means that domestic mining projects will not receive the credit for extraction alone-they must have corresponding processing operations as well.

This is a boon for companies like Sibanye Stillwater, who mine and process palladium in Montana. But for other commodities such as nickel, which has no domestic smelting operations, domestic mining projects in the pipeline will not receive financial support from Section 45X and will continue to struggle to be competitive with China-owned nickel operations in Indonesia. Talon Metals' Tamarack project may soon change this, with plans to develop a nickel source in Minnesota and process the ore in North Dakota.

The final rules make 45X a better incentive and support mechanism for the critical minerals industry by providing a significant, permanent subsidy for companies mining and refining the mineral inputs for critical technologies in the United States. Still, the United States must make significant progress to secure all the needed minerals for energy transition and national security.

Q4: What does the final rule mean for mineral processors, and how is it expected to impact industry investment?

A4: The final rule is a big improvement for domestic mineral processors who were previously unable to derive much benefit from 45X with the original guidance, as they were unable to count their high material costs towards their credit. Mineral processors that secure both domestic and imported ore from abroad qualify for the credit, but processing must take place in the United States to create end products. This incentivizes the domestic minerals industry to further build midstream capacity at home, rather than allowing ore mined in the United States to be sent abroad for processing. It addresses an important vulnerability: despite producing only 10 percent of the world's lithium, cobalt, and nickel, China imports enough from the rest of the world to process 60-90 percent of the global supply of those metals.

The credit under the final rule is now a strong incentive for projects like Ioneer's lithium operation at Rhyolite Ridge. Ioneer received its final federal permit from the Bureau of Land Management last week, making it the first lithium mine to receive approval under the Biden administration. Ioneer will not only mine the only known lithium-boron deposit in the United States but also process lithium into battery-grade lithium-carbonate materials onsite. Projects like Ioneer's can now receive both a 10 percent credit for the mining and a 10 percent credit for the processing of lithium for a significantly greater credit value than before. This additional credit could be especially impactful for companies extracting and processing commodities like lithium that are facing depressed prices due to low EV demand and an oversupply of cheaper Chinese lithium.

The final rule also opens significant opportunities for precursor cathode active material (pCAM) producers. This precursor battery material is produced by chemically combining nickel, cobalt, manganese, and other critical minerals. Therefore, pCAM producers have especially high material costs that were previously ineligible for the Section 45X credit. Unsurprisingly, there has been little growth in the domestic pCAM market thus far. This can be largely attributed to the industry's variable operating costs amid fluctuations in raw material prices. Only a couple of domestic pCAM facilities have been announced so far: Green Li-Ion's pCAM-producing recycling facility in Atoka, Oklahoma, and Ascend Element's manufacturing facility in Hopkinsville, Kentucky. The Section 45X final rule could be key in incentivizing additional investments in domestic pCAM projects, as the credit will now help offset the high material costs and break down barriers to market entry.

Q5: What does the Final Ruling mean for mineral extractors, and how is it expected to impact industry investment?

A5: Domestic critical mineral extractors, who do not have accompanying processing operations, will still not be eligible for the Section 45X credit. The Department of Treasury ruled that extraction alone does not create an "eligible component." Some actors in the mining industry have raised concerns that the final guidance still does not go far enough to incentivize investment in the first step of the critical minerals supply chain. The NMA released comments to this effect, stating, "The miners who secure the very first link in our supply chains should benefit from the same credits as the entities that refine their materials."

Section 45X has always been an incentive focused on midstream capacity and the creation of end-product critical minerals, rather than the mining of raw ore. Section 45X remains a stronger incentive for domestic processors than it is for miners. Therefore, less investment is expected to flow into new mining projects compared to processing and refining operations. To extend further support to domestic mining, policymakers should consider new incentives and permitting reforms that address ongoing challenges in the industry.

Q6: How could the Final Ruling impact mineral investments in strategic partners abroad?

A6: The 45X final rule determined that domestic mineral processors may receive credit for material costs from both domestic and imported ore. However, the production of the final end product through processing or refining must still take place in the United States or a U.S. territory. The inclusion of foreign-sourced material costs incentivizes key investments in partner nations. This is especially important for securing minerals for which the United States has insufficient or low-quality reserves. For example, the United States has less than 1 percent of global reserves and does not mine any. Syrah Resources established the first vertically integrated graphite supply chain by bringing its ore mined in Balama, Mozambique to its processing facility in Vidalia, Louisiana. Under the final rule, Syrah Resources qualifies for 45X and can receive credit for production costs related to its processor in Louisiana, as well as its material costs in Mozambique. Section 45X should continue to incentivize key projects like that of Syrah Resources, which vertically integrates critical mineral supply chains outside of China.

Key critical mineral deposits are currently being developed around the world that can fill the gaps that exist in domestic mining capacity. However, recent trends around resource nationalism and export bans may create challenges in the future for domestic processors looking to source ore from abroad. Indonesia, Malaysia, Vietnam, Guinea, Namibia, Zimbabwe, and more developing economies have announced export bans on raw nickel, rare earths, lithium, and bauxite ore, intending to grow their own midstream capabilities. U.S.-based processors may have fewer choices in the future for ore-sourcing partners. Additionally, Western companies establishing processing operations abroad to comply with ore export bans will no longer be eligible for Section 45X credits. If mineral-rich countries continue to impose ore export bans, it may become more challenging over time for U.S. processors to work with sourcing partners abroad and remain eligible for Section 45X credits.

Gracelin Baskaran is the director of the Project on Critical Minerals Security at the Center for Strategic and International Studies in Washington, D.C. Meredith Schwartz is a research associate for the Project on Critical Minerals Security at CSIS.

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