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I have reservations about anniversary journalism as the mere passage of time does not guarantee an interesting story about a past event. However, it will soon be one year since Joe Biden signed into law one of the most globally consequential pieces of US legislation in years – the Inflation Reduction Act. Interestingly, there is still much to discuss about it today as there was when it was first introduced in August.
This is particularly relevant for those of us outside the US, where the topic is being extensively covered. Let’s explore some key developments. Surprisingly, “Globally, the IRA does not worry economic experts” is the conclusion reached by researchers at Germany’s Ifo Institute think-tank after surveying experts in over 130 countries about the impact of the IRA. This seems unlikely when you’re living in Europe, where concerns about the US following China and the EU in boosting its clean energy sector with green subsidies are prominent. However, the Ifo Institute found that nearly 75% of top economists believe that the IRA is not a major topic of public debate and do not anticipate it causing harm to their economies or encouraging companies to relocate to the US. This sentiment was different in Europe, with over 80% of experts in Germany and France believing that the IRA would damage their national economies and lead to company relocations. There were also high levels of concern in South Korea.
But how valid are these fears? It is too early to say for certain, but there are some compelling arguments emerging which suggest that these concerns may be exaggerated. A recent paper from the Centre for European Reform shows that the EU is outperforming the US in global markets for green goods and surpasses even China in some measures. The paper highlights that several EU countries rank among the top performers when it comes to exporting low carbon technology goods as a share of GDP. In fact, Germany topped all G7 countries, as well as China, in this aspect in 2021. In a post-pandemic world where there is increasing pressure to shorten supply chains, the authors argue that the EU is likely to continue excelling in producing goods that are essential to the US and Chinese green industrial policies.
However, there is a concern that the EU and other wealthy US allies might engage in a protectionist spiral by rushing to match the IRA with their own subsidy packages. This could potentially increase the cost of the green energy transition and have a negative impact on clean energy investments in developing countries. It is important to proceed with caution to avoid these consequences.
On the other hand, history has shown that when a rich country like Germany subsidizes the development of a new green technology such as solar photovoltaics, emerging markets can benefit. This is one of the reasons why China has become a leader in solar energy today. Analysts at Boston Consulting Group believe that the IRA will reduce clean tech costs globally by up to 25% by 2030.
It is already evident that the IRA has had significant political implications overseas. It serves as a lesson in climate politics – if you want to implement comprehensive climate policies, avoid labeling them as such. The US presented a $369bn climate and energy package as an “Inflation Reduction Act”, and the Biden administration consistently portrays it as a job creation machine. These tactics have attracted attention abroad.
The impact of the IRA on international green industrial policies has been remarkable, particularly in London. It is surprising to witness how UK Chancellor Rishi Sunak, who has shown little enthusiasm for industrial policy, let alone a green variation, is now facing criticism for his ideological rigidity potentially hindering the country’s progress towards net zero. As the EU prepares to match the IRA’s incentives and the UK Labour opposition party promises its own green prosperity plan, the pressure on Sunak will likely continue. The early impact of the IRA in the US is evident through increased spending on manufacturing factories, driven by the IRA and other related measures reported by the US Treasury last month. It seems that while the IRA was made in America, the rest of the world may soon be buying into its ideas.
Ed, do you agree? Have we seen any interesting outcomes in Washington as a result of the global impact of the IRA?
Recommended reading:
– I recently finished “Inside Story,” the final novel written by Martin Amis before his death in May. It is an autobiography detailing his relationships with Saul Bellow, Philip Larkin, and Christopher Hitchens. Knowing that Amis passed away three years after publishing this book makes for a deeply moving read.
– Memoirs have become a popular topic lately, reminiscing about the days before email and smartphones when life seemed simpler. Dan Kois wrote an interesting piece about this in Slate, and Ian Bogost has now contributed an article to The Atlantic.
– The FT has published another investigation into sexual misconduct, this time focusing on architect Sir David Adjaye. Reporters Josh Spero and Anjli Raval spent months working on this challenging but essential story. Additionally, Antonia Cundy and Madison Marriage provide an update on their investigation into London financier Crispin Odey, with six more women coming forward with allegations of sexual assault or harassment. Odey had been ousted from his Odey Asset Management firm after the FT published accounts from 13 women who accused him of abuse.
Edward Luce responds:
To be honest, Pilita, I am still uncertain about the long-term impact of the IRA. I hope that the subsidies provided will serve as a starting point for more direct federal and state-level action to reduce carbon emissions. However, if Donald Trump is re-elected next year, I have little doubt that the legislation will be reversed. House Republicans, as you know, made the repeal of the IRA a condition for lifting the US debt ceiling last month. While they were not successful in their demands due to their small majority, their stance on green energy remains clear. Republicans tend to support carbon-intensive industries, while Democrats are more inclined towards post-carbon initiatives. This divide is becoming more pronounced over time, so we cannot take anything for granted.
The IRA’s passage was significant as it broke from US precedent on green energy and demonstrated Joe Biden’s ability to pass bills. However, we must not overstate its magnitude. Depending on adoption rates, the law provides subsidies of $30bn to $50bn annually over the next decade to accelerate America’s transition to a post-carbon future. While it is undoubtedly better than nothing, it alone is insufficient for the US to meet its carbon reduction commitments. As you mentioned, the law’s real impact could be observed through trade and subsidy actions it influences across…
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