Jane Nakano on EV Supply Chains and Hydrogen Energy in the Indo-Pacific

Jane Nakano is a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS). Her research interests include U.S. energy policy; global market and policy developments concerning natural gas, hydrogen, nuclear energy, and critical minerals; and energy security and climate issues in the Asia-Pacific region. She frequently writes and speaks on these issues at domestic and international conferences and to media around the world. She has also testified before Congress on China's competitiveness in energy technology manufacturing and exports as well as U.S. liquefied natural gas (LNG) exports and before the U.S.-China Economic and Security Review Commission on U.S.-China nuclear energy cooperation. Prior to joining CSIS in 2010, Nakano worked in the Office of International Affairs in the U.S. Department of Energy, where she covered a host of energy, economic, and political issues in Asia. From 2001 to 2002, she served at the U.S. embassy in Tokyo as a special assistant to the energy attaché. Nakano graduated from Georgetown University’s School of Foreign Service and holds a master’s degree from Columbia University’s School of International and Public Affairs.
Arlo Jay '26 interviewed Ms. Jane Nakano on November 14, 2023.
Photograph and biography courtesy of Ms. Jane Nakao.

How has the push to onshore EV battery production and lithium extraction projects in the U.S. affected Chinese supply chain dominance? What implications could the Treasury Department’s guidance on the term “Foreign Entity of Concern” have on these efforts?

The United States has been trying to onshore the EV battery supply chains, including the production of some of the requisite minerals within the country. The passage of the Inflation Reduction Act in August of 2022 has certainly helped mobilize new investments and announcements of new commitments in the development of supply chains. One year since the passage, there have been about $15 billion worth of investments made. There has been roughly $35 billion additional investments committed at this point. But, it will take a while to see all these come to a fruition since, for example, developers of new projects have to go through a permitting process. In the short run, it's very hard to make any dent on China's dominance, because China has been investing in the EV battery supply chains and the underlying critical mineral supply chains for quite a while, multiple decades by now. And as far as the domestic upstream goes, the Thacker Pass Lithium Mine is the only one that is under development at the moment. There are many planned, but it's been very hard to get the extraction of these minerals started. 

As to your question about the Foreign Entity of Concern, it's a national security guardrail provision that has been introduced in the clean vehicle tax credit under the Inflation Reduction Act. The term has been applied in other legislation as well, but as far as the clean vehicle tax credit under the IRA goes, it is meant to ensure that the federal incentives stay within a group of trusted U.S. trading partners. As far as the countries subject to the Foreign Entity of Concern go, China is only one of the four. The three others are Russia, North Korea and Iran. But China is the country that has dominance over the supply chains for EV battery components and minerals, so it is the primary concern. The actual mechanics of it are as follows: under this clean vehicle tax credit, a new electric vehicle unit can be subject to a maximum of a $7,500 consumer tax credit if it meets multiple requirements. The first notable requirement is that the minerals used in the EV battery unit are mined and processed in countries with which the United States has a free trade agreement. Second, the EV battery components are manufactured in North America. But, starting this new year, January 1, 2024, EV components that that are manufactured or assembled by a Foreign Entity of Concern will not qualify for that tax credit. Then starting the year following that, in 2025, EV batteries that use critical minerals extracted or processed by a Foreign Entity of Concern will also be disqualified. The Treasury guidance is expected to fully define this term, especially as it relates to a foreign entity that is “controlled by, or subject to the jurisdiction or direction” of China. In effect, the Foreign Entity of Concern consideration will reduce the number of EV models that will qualify for the tax credit. While it is likely to have a negative impact on the pace of deployment of EVs in the short term, it could incentivize auto manufacturers to accelerate the shift in supply chains. And in a longer run, the pace of EV deployment may comeback. Also, there is a loophole for now that leased EVs do not need to meet these FEOC restrictions which has led people to lease rather than buy EVs. 

To decrease reliance on Chinese exports, the Biden administration has used trade agreements with partners like Japan, which are unpopular with domestic industry leaders, while also using domestic production incentives like the IRA, which anger our trading partners. How should U.S. policymakers balance domestic and foreign interests when trying to reduce our reliance on Chinese supply chains?

As far as the US-Japan critical mineral sector agreement of March 2023 goes, the major concern from the domestic stakeholders, particularly from the congressional stakeholders, is that the agreement sidestepped the congressional authority over the Free Trade Agreement negotiation. Many refer to this US-Japan sectoral free trade agreement as a “lowercase” free trade agreement since it did not go through a congressional review and is not comprehensive. The traditional FTA that goes through Congress is generally not meant to be so sector specific. My sense is that the agreement is unpopular because of the way that it was introduced without proper consultation with the Congress. But in reality, at the moment China accounts for roughly three-quarters of the cathode and anode production capacity globally. The rest is pretty much equally divided between Japan and South Korea, which has a “capital letter” free trade agreement with the United States. That certainly helps the US effort to diversify the supply chains and reduce the reliance on China. So, having Japan in this group of trusted trading partners makes sense from this diversification perspective, especially in the short term. Japan is not some random country to which the Administration felt pressured to strike an agreement to simply ease their frustration over what they had perceived as protectionism through the tax credit sourcing requirements. 

The other part of your question is that there are a lot of concerns among our trading partners that these incentives from the IRA could lead to a flow of investments away from Europe and elsewhere to the United States. Some are concerned about the rise of protectionism in the form of capitalizing on the growing clean energy value chains. It's something that we're starting to see in multiple places. The US emphasis on domestic advanced manufacturing may be one. But in Europe, even before the Russian invasion of Ukraine, we've seen a greater focus on strategic autonomy or self-reliance among the 27 member countries of the European Union. There are strong desires by many political leaders to capture these growing value chains of clean energy technologies through developing or manufacturing them, and not just deploying them. Roughly two decades ago, many of the Western governments introduced consumer subsidies to encourage the deployment of these clean energy equipment with the assumption that much of the equipment and components would be manufactured domestically. But that wasn't exactly the case. In fact, China was quite successful in introducing not just consumer incentives at home, but also supplier incentives to help its clean energy technology manufacturers go abroad. Quickly enough, there was surplus, and Chinese clean energy equipment started flooding the global market. A lot of Western companies struggled to compete. Twenty years later, a lot of the Western political leaders are committed to not repeating that mistake. The rise of green industrial strategy is perhaps not a surprising inflection point in this journey.

What is the state of the clean hydrogen market in the Indo-Pacific region, and what implications does it have for actors with and without hydrogen production capabilities?

In Asia, some countries are still trying to figure what their place would be in the emerging hydrogen value chains. Could they be a supplier using the existing fossil fuels? Could they be a supplier using renewable based energy capacity? Or would they become a major consumer and end up becoming an importer? As far as national visions and strategies go, there's quite a diversity among the Asian countries. Japan was the first country to have a national strategy, but its end-use focus has traditionally focused the transportation sector. Japan is very resource poor when it comes to feedstocks to go into clean hydrogen, so they are likely to become import-dependent for hydrogen supplies. There are other governments that started articulating their plans, including South Korea, Singapore, Malaysia and others. China and India are the two really interesting cases because they are both massive continental countries that could potentially have a much faster deployment of renewable power capacity that could then feed into renewable-based hydrogen production. I am still closely watching what's happening, not just what their governments are saying, but also what their industrial stakeholders are doing, where they're investing. It's still uncertain how and when they might start wanting to consume clean hydrogen, and what some of the policy incentives are that can unlock the demand. The production side could be arguably a little more straightforward. 

China and India could become self-sufficient, but they might actually end up becoming more import dependent if they think that the domestic infrastructure is too expensive to develop to meet demand, for example in the coastal areas where there are massive port facilities and more manufacturing capacity. At the same time, the sense of energy security may steer India and China away from becoming a hydrogen importer. They may wish to in fact become an exporter. In fact, the Indian government has explicitly stated that they want to become an exporter of hydrogen, especially renewable-based hydrogen. The Chinese government has not made its feedstock preference clear. At least one major Chinese energy company has hinted at the prospect for China becoming an exporter. But their national strategy, which is more of a long-term plan as opposed to a real strategy, does not make it clear as to whether the Chinese government currently sees itself as a potential supplier or importer. Visions and developments in the Asia-Pacific are quite diverse and uneven.

China has been able to undercut more expensive European electrolyzers, the key to the production of green hydrogen, to become the world's top electrolyzer producer. Could this be the beginning of China’s green hydrogen supply chain dominance, similar to that of solar panels and EVs?

I would probably qualify that statement to say that while China has been able to offer much cheaper electrolyzers, those are mainly alkaline-based electrolyzers. So, alkaline-based Chinese electrolyzers are cheaper than the European made alkaline-based electrolyzers. But in general, alkaline electrolyzers are cheaper than more advanced ones like the Proton Exchange Membrane (PEM) electrolyzers. Alkaline electrolyzers are also less technologically advanced, and less compatible with intermittent sources of energy or electricity like renewables. China’s current lead in the global market is much more in alkaline-based electrolyzers. I think China currently supplies about 40%. But the question is, now that China is starting to invest in PEM manufacturing capacity, will it end up dominating the global market? I suspect that China will remain a major supplier of electrolyzers. And when it comes to advanced electrolyzers like PEM, it's still a little too early to tell whether China would secure the dominance that it now has in the alkaline-based global market. This is because of both IRA in the United States, and the Green Deal Industrial Plan in the EU. The European Commission has introduced a series of acts under the plan that include support for clean energy component manufacturing. We will have to see how that competition shapes up. The other important thing is the innovation piece. It’s one thing to expand manufacturing capacity, but innovation is something else. In the last decade, the Chinese have focused on manufacturing as opposed innovating electrolyzers. However, when it comes to international patent filing for hydrogen related technologies, they are starting to file more. The filing grew at 15% annually during the last decade. European, US and Japanese shares have been bit under pressure. It remains to be seen whether that trend could be changed as a result of the efforts out of Washington and Brussels.

What effect will the recently announced Clean Hydrogen Hubs in the U.S. and the expansion of the U.S. clean hydrogen market have on the Indo-Pacific region and the global hydrogen market as a whole?

The effects could be wide ranging. As the United States starts building a hydrogen economy, establishing not just the production, but also consumption, transportation and storage technologies, you may start seeing some supplies going to the global market. And with more offtakers emerging, U.S. supplies would likely help drive down the cost of hydrogen. That will at least indirectly have a helpful influence on hydrogen prices in the Asia-Pacific. That's more of an indirect scenario, because we don’t yet have ways to competitively transport the supplies to Asia, which is far away. There are a lot of other considerations needed to fully ascertain the possible influence of the US hydrogen economy. But, if US efforts could help in reducing the cost of hydrogen, then it could really help lower the barrier to a lot of economies that would find the currently projected price of clean hydrogen to be way too high for them to use hydrogen to decarbonize their own economies. 

In terms of what drives the cost of shipping, it matters what forms we end up choosing for transporting hydrogen. Hydrogen is an extremely flexible energy carrier, and it can be transported in various forms, including ammonia, MCH, liquefied hydrogen. So, there are a couple of different ways to ship, but no single form is really perfect. Some require a lot lower temperature to liquefy to be able to put into vessels to cross the Pacific, and others may have more toxic attributes. Others could be more flammable, having a lower temperature than others to combust, posing a potential fire hazard in a cargo vessel. There is no obvious form to transport hydrogen in. Shipbuilders and companies that want to charter these ships would need to know what the customers and offtakers may want—how the hydrogen is going to be used. Ammonia is a very established form that has already been shipped around the world, which is great. But unless whoever receives it will be consuming the hydrogen in the form of ammonia, you would have to add “cracking” capacity to turn ammonia back into hydrogen, which requires additional investment. There are a lot of things that still need to be figured out. So, the potential US contribution could be big, but it's a little too early to tell the scope of contribution, or the pace of effect--how quickly there might be an effect on the Asia-Pacific.

Arlo Jay '26Student Journalist

Marqueed at English Wikipedia, CC BY 3.0 <https://creativecommons.org/licenses/by/3.0>, via Wikimedia Commons

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