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The US climate bill has made emission reductions dependent on economic success

The landmark legislation is a radical rethinking of US industrial policy that is both promising and risky.

November 21, 2022
Paper mill smoke stack blowing smoke out at sunset
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In August, President Joe Biden signed the Inflation Reduction Act (IRA) into law, the largest US climate bill in more than a decade. The legislation puts the country back on track to meet its commitments under the 2015 Paris Agreement.

Beyond enacting specific measures to reduce US carbon emissions by more than 40 percent by 2030, the IRA also fundamentally reframes how the government approaches climate change. After decades of understanding climate policy as primarily about cutting emissions, the IRA pitches it as an opportunity to invest in new sources of economic growth.

The IRA does this primarily through a series of updated tax incentives, which require electric vehicle batteries, wind turbines, and solar panels to be manufactured in the United States (or a free trade partner) to qualify. Implicit in the IRA is the notion that taking advantage of the economic opportunities presented by the global energy transition will require new forms of government intervention in the economy. Such direct government policy intervention on behalf of domestic clean-energy manufacturing sectors breaks with Washington’s past approach to industrial policy, which primarily focused on public investments in R&D and support for clean energy markets.

This reframing of climate change as an economic opportunity is overdue. China has long used the tools of the state to secure market share in rapidly growing clean energy industries. That nation now makes more than 85% of photovoltaic cells used in the global production of solar modules. It also produces 78% of the lithium-ion batteries used in the assembly of battery packs for electric vehicles and energy storage. The European Union, too, has not merely set ambitious climate goals—it has used industrial policy to build clean energy sectors and transition domestic industries, such as automakers, to a low-carbon future.

Since it first passed the House and Senate in August, the IRA has been met with much enthusiasm. The White House called it the single most impactful climate legislation ever passed in the US. Scientists see it as a turning point in the climate change battle. Others have emphasized the potential to create a half-million jobs through the industrial policy provisions contained in the bill. Indeed, solar PV, battery, and electric vehicle manufacturers have been quick to announce new investments in domestic production facilities in the weeks since the bill was signed.

Such enthusiasm notwithstanding, the US will still face formidable challenges in building up its domestic clean energy industries.

The nation is entering markets already crowded with international rivals, many of which have been investing billions for decades. China alone has spent more than $50 billion to establish control of virtually every segment of the solar supply chain. To compete with China's dominance in electric vehicle batteries, the European Union established an alliance in 2017 with the goal of ensuring that European firms are suppliers along the entire battery supply chain. To advance its goal of building domestic clean energy supply chains, the EU also spent more than 40 percent of economic stimulus funds allotted during the start of the covid-19 pandemic on green industrial policy initiatives, to build up clean-energy supply chains.

To establish US clean energy industries that can replace and compete with global wind, solar, and battery supply chains will be particularly challenging in the timeframe envisioned in the IRA. Many content requirements contained in the tax credits take effect almost immediately. But developing domestic manufacturing capacity and opening new mines could take years, not months.

If US supply chains for solar, wind, and batteries take longer to build than expected, clean energy products will fail to qualify for government support, which could in turn slow deployment. Climate policy is now explicitly framed as an economic policy issue, dependent on economic policy success in ways that could complicate efforts to reduce US carbon emissions.

This could be particularly problematic, because the use of the so-called local content requirements and other industrial policy tools in the IRA—including loans for retooling and constructing manufacturing plants—is unprecedented in the United States. And even if meeting supply chain targets turns out to be unexpectedly difficult, it would be difficult to adjust and tweak the bill. Narrow political margins in the House and Senate offer few prospects for correcting industrial policy goals and incentives contained in the IRA, even if they threaten to undermine the bill’s climate objectives.  

The bill, for all its novel use of industrial policy tools, is also noteworthy for the things that it does not include. The local content requirements attached to the tax credits set important incentives for firms to establish domestic manufacturing capacity, but they fall short of proactive industrial policies to help firms meet these goals. To be fair, among other stipulations, the IRA includes substantial loans and loan guarantees for the establishment of domestic manufacturing plants in clean energy sectors, but such one-time investments are not a replacement for long-term fixes to US manufacturing.

The US financial sector has long been unwilling to fund domestic manufacturing, particularly in industries such as clean energy that heavily depend on government regulation. To scale up, these businesses also need a trained workforce, which will entail new investments in vocational training and coordination with clean energy industries to develop new curriculums and establish workforce needs. Meeting the industrial development goals of the IRA will necessitate new kinds of financing and training institutions that are not part of the bill itself.

Reframing climate policy as economic policy is not just important for the future of US competitiveness, it is politically savvy. Creating jobs in clean energy sectors will help build new coalitions behind climate policy, including in states where climate change has not yet been a priority of voters.

At the same time, the bill is just the starting point of a much broader industrial transformation. To make good on the IRA’s economic development goals, the US will need to fix structural problems that have long caused a decline in US manufacturing and are not addressed in the IRA itself. Because climate and economic outcomes are now so closely linked, failing to do so will jeopardize the growth of clean energy industries and the ability of the United States to meet its Paris Agreement goals.

Jonas Nahm is an assistant professor at the Johns Hopkins School of Advanced International Studies and expert on green industries.

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