While it’s been hailed as a historic piece of climate legislation, the Inflation Reduction Act is less a climate bill, per se, than a piece of industrial policy focused on building out domestic supply chains for clean energy that will benefit the climate. That’s a big deal. By international standards, though, the United States is still catching up and relying mainly on the kinds of demand-side incentives that have long speckled the U.S. tax code.
Public and private spending on the energy transition in China last year totaled $266 billion, compared with $114 billion in the U.S, according to Bloomberg. That’s all a far cry from the $9 trillion in annual investments that McKinsey estimates will be needed to reach net-zero by 2050. But the IRA—and the shock waves it sends through trade and investment policy—could play an outsize role shaping how and whether that money gets out the door.
The bill represents a sea change in how D.C. policy circles tend to think about climate policy, discarding narrow talk of carbon pricing and “market-fixing” in favor of viewing emissions reductions as an investment challenge in which the state can play a big role shaping markets. “Shifting from this idea of taxing something so we cut to building and investing is a really big shift,” said Jonas Nahm, a political scientist at Johns Hopkins School of Advanced International Studies whose research focuses on green industrial policy. “The U.S. isn’t the first country to realize that’s important, and it’s important for the U.S. to catch up to other places that have been doing that for a long time,” he added, noting he was enthused to see the bill become law.
If the thinking behind the IRA is new, its methods are fairly conventional. The driving force behind its climate provisions is expanded tax credits devoted principally to growing demand for clean energy products. There isn’t much in the way of structural support to help companies meet that demand—something other governments have included in similar packages. Structural support can take many forms, from providing money for specialized vocational training, for instance, or a dedicated infrastructure bank like KfW in Germany. “Just because there’s a change in demand doesn’t mean you have immediately available a workforce that can provide that service,” Nahm told me.
The IRA does include some money for addressing structural constraints. The bill contains $500 million in funding for the Defense Production Act that can be used to remedy supply chain challenges. There’s also $2 billion in funding for the Domestic Manufacturing Conversion Grant Program, for manufacturers to retool facilities, and $3 billion in new loan authorities for the Advanced Technology Vehicle Manufacturing Loan, aimed at the auto industry in particular. A $5 billion appropriation for the Department of Energy’s Loan Program Office aims to issue up to $250 billion in loans to clean energy companies, although exactly how those funds will be dispersed remains to be seen.
As Roosevelt Institute’s Todd Tucker has noted, the IRA grafts the kinds of provisions usually found in procurement deals onto its broad suite of tax incentives. That is, requirements that would usually be in place only when certain firms sell goods and services to the government will now be inscribed into the tax code.
Off the bat, for instance, 40 percent of the components of cars will need to be made in the U.S. or in a free trade partner to qualify for a new $7,500 electric vehicle tax credit furnished by the IRA. That requirement will ramp up by 10 percent per year, toward an 80 percent requirement by 2027. As of now, only 21 of the 72 electric vehicles now available in the U.S. are eligible for the credit through the end of this year.
By 2024, cars featuring any battery components made or assembled by a “foreign entity of concern,” including China, will be ineligible for the credit. The year after, batteries must exclude so-called critical minerals like lithium or cobalt that are extracted, processed, or recycled by the same countries. China currently refines 73 percent of the world’s cobalt, 68 percent of its nickel, and 59 percent of its lithium—all essential components of batteries used in E.V.s and for energy storage. Such constraints, some experts argue, could make all E.V.s available in the U.S. ineligible for IRA-provided tax credits in the coming years.
As E&E News’s Jael Holzman has reported, mining companies are ecstatic about such requirements and the other boosts the bill provides to domestic minerals mining and processing. Companies will now be able to write off 10 percent of the costs of their operations if they produce any amount of “critical minerals,” a relatively vague definition that can change over time. That’s on top of 150-year-old rules that currently govern hard-rock mining and allow mining companies not to pay royalties to extract minerals on federal lands.
Even with these gifts to the mining industry, a fleshed-out domestic supply chain for the minerals E.V.s require will take years to build. In the meantime, stringent domestic content requirements could send companies scrambling to snap up limited supplies.
The U.S. has battled exactly these kinds of protectionist provisions from other countries in the past, in particular when it comes to Chinese industrial policy. “Washington has blamed Beijing for unfair practices, and a lot of them weren’t unfair. China was taking the industry seriously and investing in it,” Nahm said, referring specifically to buy-local provisions. “I’m glad we’re realizing that’s a thing we should be doing.” As demand for clean energy scales up, he added, “there’s space for everyone.” While there are likely to be significant “transition pains,” Nahm largely sees the potential trade-offs of local content requirements as worth it over the long haul to build support for future climate policy.
“Some of these economic benefits need to happen domestically,” he told me. “Politically, it’s not sustainable to switch to technologies that are almost entirely produced abroad and need public money to be commercially attractive.” While the U.S. is still likely to import clean energy components from China for at least a decade, he said, “the more we do domestically, the less upset we might be about the things that are coming in from abroad.”
Trying to protect the nascent domestic clean energy industry, however, could run up against international trade rules that the U.S. has had a heavy hand in crafting. One provision in the IRA—to give bonus credits for the purchase of electricity generated by domestically made wind turbines and solar panels—could run afoul of the U.S.-Mexico-Canada Trade Agreement, since it doesn’t also offer an exemption for free trade partners. The U.S. has recently raised complaints against Mexico under the same treaty, arguing that state ownership in the Mexican energy sector unfairly disadvantages U.S. firms, including clean energy companies. Already, the European Union and South Korea—a leading battery producer—have raised alarms that E.V. tax credits in the IRA violate World Trade Organization rules barring discrimination against foreign producers.
“There’s a very clear double standard between the embrace of industrial policy and Buy America positions in the IRA and in the CHIPS Act [the $52 billion bill aimed at jump-starting semiconductor manufacturing] versus their continued attempts to impose the old neoliberal rules against those sorts of policies when it comes to other countries,” said Tobita Chow, director of Justice Is Global, an organizing project focused on trade and industrial policy. “I don’t see how you can say that these sorts of policies are good when it comes to the U.S. but that they are unfair or a form of cheating when it’s Mexico or China or some other developing country doing it.”
The optimistic way to look at this is that the Inflation Reduction Act could prompt a rethinking of an international trade consensus crafted in very different times, without the climate crisis in mind. Using its outsize voice in the WTO, the U.S. could help level the playing field for other countries to pursue their own industrial policies and create a more resilient global clean energy supply chain, which builds in strong protections for workers and the environment. “As progressives, we’ve got to say industrial policy is good, and if it’s good enough for the U.S., it’s good enough for other countries,” Chow added. “We need to establish some new rules that will allow all governments to engage in industrial policy.”