The prospect that the European Union will classify lithium as toxic is adding to worries in the electric-vehicle battery industry that policy makers aren’t doing enough to attract investment and the EU will lose out to the U.S., an attractive destination for such companies partly thanks to the Inflation Reduction Act.

Last week, the European Commission was set to give a final ruling on whether lithium, a crucial battery input, should be classified as a toxic substance. The commission’s scientific arm recommended that it do so. 

The decision by the EU’s executive arm has now been pushed back into the new year, the second delay in as many months. Europe’s nascent battery companies are warning that investors may be drawn away from the continent to the U.S. where the IRA has created strong incentives to establish supply chains in the country. 

If lithium is labeled toxic, those handling it would be subject to extra safety measures, adding millions in extra costs for prospective lithium refiners and battery makers in Europe, expenses that are absent in the U.S., China and the U.K., industry experts say. 

So far, within the European battery industry, Sweden’s Northvolt AB has been one of the few victories for the EU. Northvolt operates the bloc’s flagship battery project, a gigafactory in the north of Sweden. The company is currently valued at $12 billion and is a supplier for some major car makers including Bayerische Motoren Werke AG and Volkswagen AG

The Northvolt Ett gigafactory started producing commercial batteries in May of this year and plans to scale up to 60 gigawatts hours—equivalent to one million electric vehicles a year—by 2025/26. At least two more gigafactories in Sweden along with one in Germany are already in the works.

Northvolt has said, however, that it remains lukewarm about making further investments in Europe due to the pull of the U.S., saying that production costs are 30% lower there because of the IRA.

The Northvolt Ett gigafactory in Skelleftea, Sweden.

Photo: Jonathan nackstrand/Agence France-Presse/Getty Images

Earlier this month, European Commission President Ursula von der Leyen alluded to worries about critical supply chains and the IRA. She said the EU should “simplify and adapt” its rules that limit state funding to make it easier for public investments. 

For those looking to establish European battery production, the EU’s position on electric vehicles remains confusing. On the one hand, there are incentives, such as the Critical Raw Materials Act; on the other hand, the proposed classification of lithium as toxic could stifle refining projects and drive away investment. 

“At a time when other nations such as the U.S. are opening their doors, taking down barriers and putting their taxpayer’s money on the line to strategically attract and build battery-metals supply chains […] Europe is putting up barriers to companies in this market,” said Richard Taylor, a founding director of Trafigura-backed Green Lithium Refining Ltd. 

“If the opportunity is not attractive in Europe, companies won’t bother setting up [there],” Mr. Taylor said. 

In contrast, the IRA is quite clear: promising tax credits and subsidies for American-made electric vehicles and components, while also favoring raw material supplies from countries that have free trade agreements with the U.S. 

“America is doing the right thing, they are supporting this massively with the IRA,” said Lars Carlstrom, founder and CEO of two gigafactory startups, Statevolt in California and Italvolt in Italy. “We haven’t seen anything such as it, and in Europe all of a sudden when we thought we were well supported here, it is actually nothing compared with what America is now doing.” 

Write to Yusuf Khan at [email protected]

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This post first appeared on wsj.com

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