The Climate, Critical Minerals and Clean Energy Transformation Compact

20 May 2023 saw Prime Minister Anthony Albanese and US President Joe Biden sign the Climate, Critical Minerals and Clean Energy Transformation Compact (Compact) at the sidelines of the annual Group of Seven (G7) Summit in Japan.

The Compact is a landmark joint formal statement of strategic intent to establish climate, clean energy, and a shared energy industrial base as a third pillar of the Australia-US Alliance (alongside defence and economic cooperation). It is a win for Australia and for Australian companies seeking to benefit from the pathway towards global decarbonisation.

However, the Compact provides – at best – a framework for future discussions between the two nations on a range of climate and clean energy related policies. There is no doubt the Compact will support the expansion and diversification of clean energy and critical minerals supply chains, which will indirectly benefit Australian companies. However, early press reports suggesting that the Compact will allow Australian companies to tap into the massive subsidies and other financial support provided under the US’ landmark Inflation Reduction Act of 2022 (IRA) in our view are too optimistic. The operation of the Compact is likely to be more nuanced in practice, as we explain below.

What is the Inflation Reduction Act (IRA) of 2022?

The IRA, which President Biden signed into law on 16 August 2022, has been lauded as the US’ largest ever climate spending package, aimed at positioning the US as the global leader in clean energy technology, manufacturing and innovation – by luring global capital investment towards the US.

The IRA earmarks about AUD$520 billion in US federal spending towards de-risking and diversifying global investment and development across the clean energy sector – within American borders. Rather than imposing an emissions related tax, the IRA dangles ‘carrots’ by offering over 20 new or modified incentives, including by way of production tax credits (to support domestic manufacturing of clean energy technologies), investment tax credits (for zero emission energy generation and storage facilities), rebates for families and small businesses (to decarbonise through home electrification and electric vehicles), loans, grants and more.

According to the Climate Council of Australia, ‘[e]arly analysis suggests the IRA is working as intended, having catalysed more than US$150 billion (AU$220 billion) in private investment in clean energy projects and a boom in new solar, battery and electric vehicle manufacturing facilities in the nine months since the legislation passed. This surpassed total investment into US clean power projects commissioned between 2017 and 2021’.

However, positive sentiment towards the IRA has been matched by concern in Australia that our clean energy sector would be unfairly prejudiced, because Australia’s ability to attract or hold onto local investment and development towards its own clean energy ambitions within its borders will be diminished. The recurring question – will Australia launch its own version of the IRA, and if so, when? – has largely gone unanswered until now.

The reality is that Australia simply does not have the financial firepower to match spending with the US. As we have pointed out before, to date the Federal Government has focussed on limited and targeted support in enabling information and technology transfer both within and outside its borders. The signing of the Compact provides context, for example, to the $57.1m appropriation for the Critical Minerals International Partnerships Programme in the 2024 Federal Budget, and will no doubt quell some local concerns that the IRA harms the interests of one of the US’ most loyal allies.

The Compact – what is it?

Under the Compact, Australia and the US’ overarching objectives are to:

• accelerate the expansion and diversification of end-to-end clean energy supply chains – by identifying areas where Australia and the United Sates can coordinate the development of their respective clean energy industrial bases
• promote responsible, sustainable and stable supply of critical minerals – by sharing information to allow supply coordination and identify innovative solutions including standards and investment
• drive the development of emerging battery technologies – to further engagement and coordination on energy storage and battery operability, standards and recyclability
• support the development of emerging markets for clean hydrogen and its derivatives – by coordinating hydrogen research, innovation and deployment

According to the Compact, to achieve these objectives, Australia and the US intend to:

• engage Australia and the US’ critical minerals and clean energy industries – to identify and address barriers to development and deployment
• collaborate on projects and standards for clean energy supply chains – including in connection with the IRA (although the Compact does not identify how)
• promote robust emissions accounting methodologies for key sectors and products – with a view to aligning domestic standards
• assess Australia and the US’ clean energy job projections and workforce requirements – to identify areas where skills and training are necessary

Clearly, the Compact is a statement of policy and its parameters and practical application have yet to be ironed out by Australia and the US – that will come at the end of 2023. According to the Compact, the US National Security Council and the Australian Department of Industry, Science and Resources will cooperate on the ‘Clean Energy Industrial Transformation’ to put together a concrete plan of action for achieving the core objectives of the Compact by the end of 2023. Further, the Council and the Department will establish the ministerial-level Australia-US Taskforce on Critical Minerals to ‘to work with industry leaders to develop and expand reliable, responsible and secure global access to critical minerals, strengthening global supply of critical minerals through the development of a shared energy industrial base’.

As noted by the World Resources Institute, the IRA, in effect, provides incentives in the form of tax credits where critical minerals are domestically sourced – which incentivises US companies to incorporate US sourced critical minerals in all types of clean energy components. For example, renewable energy projects need to incorporate 100% of US-made iron and steel to gain access to the 10% domestic content tax credit bonus. Further, for battery production, at least 40% of the value of critical minerals needs to come from the US itself or be sourced from an ally with which it has a free-trade agreement, like Australia.

Prime Minister Anthony Albanese has reportedly stated that ‘President Joe Biden will support the Congress taking action to treat Australian suppliers and activity as domestic activity in the US’ – for the purposes of the US Defence Production Act – and, in turn, for the purposes of the IRA. However, even if passed by Congress, at this stage we would not expect the Compact will actually allow those Australian suppliers access to tax credits, loans or grants available to US players – rather, we expect ‘domestic’ status would incentivise US companies to import more Australian critical minerals and renewable energy transition materials – which would in turn indirectly make Australia a key beneficiary of the IRA.

In any event, the signing of the Compact goes part of the way towards restoring Australia’s global reputation as a lead partner to the US in the global race towards rapid global decarbonisation.

Australia and the US – a strategic partnership

Although it is unclear exactly how the Compact will translate into practice, the commercial rationale underpinning the Compact is clear: the US does not have a stable supply of critical mineral reserves to meet its own ambitions alone – and Australia as a strategic ally. As noted by the World Resources Institute:

• the US does not mine significant quantities of critical minerals required for its decarbonisation strategy
• the US is reliant upon imports for virtually all critical minerals as essential inputs for everything from wind turbines to energy storage batteries
• the US is 100% reliant on foreign imports for 12 critical minerals (eg, graphite) and greater than 50% reliant on imports for another 31 critical minerals (eg, cobalt and nickel)

In contrast, as the Climate Council of Australia notes, Australia enjoys crucial global commercial advantages given its world scale, low cost renewable energy potential to supply and manufacture critical minerals and energy transition materials:

• Australia is the world’s top supplier of lithium – and global demand for battery minerals continues to skyrocket
• Australia is ‘the windiest and sunniest inhabited continent on the planet’ – and wind and solar are the major sources of renewable energy
• Australia has formidable reserves of iron ore, metals and critical minerals such as copper, nickel and cobalt – which are required for component parts including the manufacture of batteries and electric vehicles

How the IRA Could Reshape Australia's Clean Energy Landscape

As noted in The Australian, while the inclusion of Australian companies in the IRA could give local projects that wish to join the US’ supply chain access to more than $US40bn in cheap loan programs run by the US Department of Energy and other agencies, ‘the real question is whether the US is prepared to give Australian producers access to other parts of the [IRA] by extending some of the US production credits and subsidies to downstream refining and manufacturing in Australia’.

If Australian suppliers can somehow actually access the IRA incentives in future, we expect what Black Rock has described as a ‘multiplier effect’ across clean energy technologies and markets: higher adoption and lower costs will in turn ratchet up even higher adoption, which will further drive down costs – which will trigger an influx in further private investor capital into clean energy developments (including Australia’s $3.4 trillion superannuation assets) – and, in turn, substantially de-risk clean energy projects.

Commonwealth Minister for Resources Hon Madeleine King has been charged with responsibility for fleshing out the detail of the Compact with her US counterparts. In doing so, she will carry the hopes of the Australian decarbonisation sector on her shoulders.

Authors: Justin Mannolini, Simon Rear, Cassandra Lee and Alana Cristinelli