What Have We Learned One Year After the Passage of the Inflation Reduction Act?

One year has passed since the U.S.’s Inflation Reduction Act was signed into law, making it one of the longest-lasting and far-reaching pieces of U.S. legislation in modern memory (with the funds remaining available until September 30, 2031). For people like myself who are trying to follow along and aren't based in the U.S., it feels like whole books' worth of content has been published on the topic.

After taking a step back and reflecting on the last year, let’s start with a claim that seems impossible from where I am in Oxford:

Are economists worldwide not worried about the Inflation Reduction Act?

The answer seems to be no, according to German researchers at the Ifo Institute who polled Inflation Reduction Act specialists in over 130 countries.

If you live in the United Kingdom or Europe, you might think that it was extremely likely that the U.S. would bolstering its renewable energy industry with huge green subsidies.

The Inflation Reduction Act of 2022 provides USD 369 billion in green subsidies and tax credits with the goal of halving carbon emissions by 2030 by incentivizing renewable energy production in the states. It is recognised as a significant step in addressing climate change.

However, according to a study conducted by the Ifo, 75% of prominent economists agreed that the Inflation Reduction Act was not a hotly debated issue in their countries, and that they did not believe that it would have a negative impact on their economy or cause businesses to relocate to the U.S.

Evidently, things were different in Europe. While European policy shares the Inflation Reduction Act’s goals of increasing the move to a sustainable economy and growing away from China, European leaders have expressed worries that the act prejudices against European companies and may move green capital from the European Union (EU) to the U.S. A large majority of experts predicted that the Inflation Reduction Act would cause businesses to migrate outside of their own countries and where over 80% felt that the act would impair their national economy.

But how reasonable are these apprehensions?

Although it is too soon to know for sure, there is mounting evidence to suggest that their severity has been greatly overstated. New research by the Centre for European Reform (CER) shows that the EU is outperforming the U.S. and, by some measures, even the global green powerhouse, China, in the worldwide markets for green products.

More solar power capacity will be added in China in 2023 than in the EU, U.S., India, and Brazil put together, according to the International Energy Agency.

The CER’s research also found that in 2021, Germany topped the G7 in exports of low-carbon technological items as a share of GDP, while many EU member states also ranked well.

I agree with the authors that the EU should maintain its leading position in producing many of the items that are key to the U.S. and China’s green industrial programmes in a post-pandemic world where there is increasing demand to shorten supply chains. There is also, however, a danger that a protectionist cascade may be set off by the EU and other wealthy U.S. friends trying to match the Inflation Reduction Act's support packages. It may reduce investments in renewable energy in underdeveloped countries and drive up the cost of the shift to green energy.

These worries are valid if preventative measures are not taken.

However, there is some evidence that emerging countries can profit when a developed country—such as Germany—subsidises the development of a new green technology, such as solar photovoltaics. It is why China has become a solar giant in recent years. Boston Consulting Group's analysts maintain their December forecast that the Inflation Reduction Act will cut global renewable technology prices by as much as 25% by 2030.

Already, the Inflation Reduction Act’s political influence can be seen across the world as in the emulation or matching in such public spending spree as Brazil’s. It has demonstrated the need of not calling a policy comprehensive when referring to climate change mitigation efforts. For a country with such a rich history of legislative acronyms, the presentation of a USD 369 billion package of climate and energy policies as the Inflation Reduction Act is truly extraordinary. The Biden administration's promotion of the Inflation Reduction Act as a source of new employment opportunities is also being widely watched in other countries.

?Now that the EU is getting ready to match the Inflation Reduction Act’s incentives and the Labour opposition party in the U.K. is promising its own green prosperity plan, Rishi Sunak is getting criticised for letting his country fall behind in the global sprint to net zero because of his ideological intransigence.

Because of the Inflation Reduction Act’s initial effects at home, this pressure is not going away very soon. After the Inflation Reduction Act and other measures like the Infrastructure Investment and Jobs Act (IIJA) and the Chips Act were passed, the U.S. Treasury stated last month that investment on the development of manufacturing plants had surged.

Although the Inflation Reduction Act was initially developed in the U.S., I anticipate that many non-U.S. citizens will eventually invest in it. The major question is whether the Inflation Reduction Act’s international effect has any interesting repercussions in the nation's capital.

David, what do you think?

Have you seen any intriguing developments in North America because of the global impact of the Inflation Reduction Act??

The IRA and the Chips and Science Act are two examples of an overarching policy shift in the United States: an attempt for the U.S. to start making and producing things at home once again. While some hyperbole is included, it is well understood that the U.S. has not kept up with other parts of the world where things are made, manufactured, and produced as well as it should.

Decades ago, the U.S. was a leader in manufacturing and production. These two laws, while coming at it from completely different angles (IRA in terms of renewable energy and the Chips and Science Act for semiconductors) attempt to get us back there to a certain extent.

Mark, you are right, one of the biggest drivers of the IRA is simply a need to become more sustainable and work towards the Biden Administration’s laudable goal of achieving net-zero greenhouse gas emissions by 2050. There are other, more nuanced, reasons for the aforementioned laws, namely an acute need to diversify our supply chains as COVID and certain geopolitical reliance’s have hampered our logistics and supply chain resiliency.

In my mind, the biggest question, from a U.S. perspective and now that we are a year in to the IRA, is it working?

Mark, you touched on how other countries are thinking about the IRA and perhaps instituting similar regulation, but frankly, I think the jury is still out on whether or not the IRA has had the impact that the Biden Administration has hoped for.

There are a few things to note:

The first what impact this generational push to become more sustainable has actually had on the reduction of greenhouse gas emissions? Of course, we are just a year in but early signs seem promising. The U.S. Department of Energy’s preliminary assessment earlier this year finds that the IRA, in combination with the Bipartisan Infrastructure Law and some other past actions, are projected to drive 2030 economy wide GHG emissions to 40% below 2005 levels. Specifically, DOE estimates that the two laws could help reduce nationwide GHG pollution by nearly 1,150 MMT CO2 e in 2030. Notably, these drastic changes are still perhaps not enough to get the U.S. to its goal of a 50% reduction in emissions by 2030.

Secondly, incentivizing this change comes at a financial cost, notably through higher energy payments in the short term. An obvious byproduct of switching to renewables isn't just the fact that they are greener – but that doing so will eventually lower energy costs by harnessing the power of sources like wind and the sun. Unfortunately, in the short-term, some Americans are having to pay more in the energy bills to support their state or locality’s effort to move off fossil fuels. This is a major issue to watch as we come up on 2024, a major election year in the U.S.

Another issue is what effect are the tax credits and financial incentives having on energy companies, i.e. are they actually changing their business models to produce more renewable energy? The short answer is yes and the numbers are staggering. As of July 2023, clean energy projects creating more than 170,000 new jobs in 44 states were announced or advanced in just one year. There are 272 new clean energy projects in small towns and big cities nationwide, totalling $278 billion in new investments. The projects are diverse too and include everything from new battery manufacturing sites in Tucson, Arizona; Rochester, New York; and Florence County, South Carolina to new or expanded electric vehicle manufacturing facilities in Savannah, Georgia.

Lastly, I think an important question is whether this policy shift really here to stay. Like many things, a post-COVID world looks a lot different than before. One of the things that the U.S. has clearly revaluated is how and to what extent we rely on the rest of the world, and certain countries, for certain goods, products, and services. If the U.S. can produce more clean energy, and things like semiconductors and chips, we may become less dependent on outside sources in the long-term, which will serve us well for years to come. And that is generally something that policymakers on both sides of the aisle can agree on.

This isn't a race to the finish line, the United States must obviously collaborate with global partners "to build a cooperative international framework around the IRA's investment incentives" and "build resilient energy supply chains, particularly for critical minerals."

So, Mark only time will tell.