Toyota and battery-recycling firm Redwood Materials on Thursday announced an expansion of their previous agreement that will see Toyota source battery materials from Redwood for future battery production.

Toyota announced plans to work with Redwood on recycling of battery materials in June 2022. But it’s now confirming plans to also source recycled material for battery production from Redwood, which earlier this year received a $2 billion loan from the Department of Energy to expand its operations.

While the relatively small size of the current EV fleet means it isn’t much of a source for recycled material, Toyota anticipates a growing need for recycling as more of its hybrids—such as the first-generation Prius introduced more than 20 years ago—reach the end of their lifecycles.

Under the expanded agreement, Toyota will source cathode active material and anode copper foil from Redwood. The recycling company calls them “the two most critical battery components,” noting that while they account for the majority of the cost of a battery cell, they are currently manufactured entirely overseas.

Redwood will soon supply these materials to the Toyota Battery Manufacturing North Carolina plant scheduled to open in 2025. Although these materials might end up in hybrid batteries from this plant, Toyota’s biggest incentive, based on Biden administration policy and battery-materials sourcing rules for the federal EV tax credit, is to use them in EV batteries.

Tax-credit rules now require battery raw materials to be sourced domestically or from countries with which the U.S. has a free trade agreement, while current foreign policy discourages importation of battery materials from China. Materials from Japan and South Korea may be eligible right now, but it’s unclear whether this loophole will stick. So a U.S.-based recycling scheme is a safer long-term bet.

Toyota and Redwood Materials battery recycling

Redwood currently operates a facility in Nevada, and plans to break ground on a second facility in South Carolina later this year. Both will recycle and remanufacture battery materials, with an ultimate goal of 100 gigawatt-hours of battery components annually.

The agreement between Redwood and Toyota calls for 20% recycled nickel, 20% recycled lithium, and 50% recycled cobalt in cathode material, and 100% recycled copper for the anode copper foil. Redwood claims this will make its battery materials the most sustainable on earth, but doesn’t discuss cost, which has become a limiting factor in EV affordability.

Whether they are newly produced or recycled, battery raw materials will be key to automakers’ EV goals. General Motors in 2022 said it had secured all battery raw materials to produce one million EVs annually by 2025—primarily through supply agreements rather than recycling.