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Why Honda's U.S. EV battery plant likely wouldn't happen without new climate credits

Honda’s (HMC) electronic vehicle (EV) ambitions took a big a step today, with the Japanese automaker signing a deal with Korea’s LG Energy Solution (LGES) to build a lithium ion battery plant in the U.S.

Though the location of the plant hasn’t been determined, Honda and LGES (373220.KS) will spend $4.4 billion on the joint venture, which will seek to have an annual battery production capacity of 40 gigawatt hours (GWh). Automakers estimate that each GWh of battery capacity can conservatively support 10,000 vehicles.

The batteries will be used exclusively for Honda and Acura EVs produced in North America with construction of the plant beginning in 2023; mass production of the batteries is expected to start by the end of 2025.

A Honda SUV E prototype is displayed during the 19th Shanghai International Automobile Industry Exhibition in Shanghai on April 20, 2021. (Photo by Hector RETAMAL / AFP) (Photo by HECTOR RETAMAL/AFP via Getty Images)
A Honda SUV E prototype is displayed during the 19th Shanghai International Automobile Industry Exhibition in Shanghai on April 20, 2021. (Photo by Hector RETAMAL / AFP) (Photo by HECTOR RETAMAL/AFP via Getty Images) (HECTOR RETAMAL via Getty Images)

"Aligned with our longstanding commitment to build products close to the customer, Honda is committed to the local procurement of EV batteries, which is a critical component of EVs. This initiative in the U.S. with LGES, the leading global battery manufacturer, will be part of such a Honda approach," Honda President and CEO Toshihiro Mibe said in a statement.

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While Honda is committed to building EVs in North America, it would not be surprising if the just passed Inflation Reduction Act (IRA) played a big role in Honda and LGES inking their battery deal sooner rather than later.

Youngsoo Kwon, CEO of LG Energy Solution, and Toshihiro Mibe, President, CEO and Representative Director of Honda Motor Co., Ltd.
Youngsoo Kwon, CEO of LG Energy Solution, and Toshihiro Mibe, President, CEO and Representative Director of Honda Motor Co., Ltd. (Honda)

The IRA, in addition to federal tax credits for the purchase of EVs, also includes incentives for manufacturers to build batteries in the US. The IRA provides $35 per kilowatt hour (KWh) in tax credits to manufacturers for each US-produced battery.

“The biggest benefit [from the IRA] isn't actually the EV consumer credits, it's the $35 per kilowatt hour support for battery production in the country,” Ford (F) CEO Jim FarleyFarley said in an interview with Yahoo! Finance during Pebble Beach car week. “We're bringing the battery production [back here], we could easily have done that in Mexico or some other place, and now there's a huge financial incentive… It’s a big deal.”

The amount of money could be staggering. Ford’s new battery plants, located in Kentucky, will produce around 86 gigawatt hours (GWh) annually by 2025. That would equate to slightly over $3 billion in tax credits for Ford, per year. Note that Ford earned $8.8 billion in profit last year if you back out its gains from its Rivian holding, so the gains from the battery tax credit are substantial.

Looking at Honda and LGES’s financial incentives, the joint venture has a goal of 40 GWh of annual capacity, which would equate to around $1.4 billion in tax credits alone per year, likely split by both companies.

Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.

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