Can the U.S. fight climate change — and shift industrial policy?

Analysis by Jonas Nahm, Joanna Lewis and Bentley Allan that originally appeared in the Washington Post.

On Friday, the House will vote to approve the Inflation Reduction Act (IRA), clearing the way for President Biden to sign the bill into law. The IRA addresses health care and taxes — but it’s also the first and most ambitious federal effort to address climate change in at least a decade. These provisions alone won’t meet the U.S. goal of cutting emissions in half by the end of the decade, but are still likely to reduce U.S. emissions by about 40 percent

The IRA also marks a radical shift in federal-level climate policy. It tries to combine climate change policy (slowing down global warming) with industrial policy (building up U.S. manufacturing). If the new provisions work as the bill’s designers hope, the IRA may have transformative political consequences.

The IRA tries to move clean energy manufacturing away from China

In 2021, the Biden administration carried out a comprehensive review of U.S. supply chains for key clean energy technologies. The review revealed that clean energy industries overwhelmingly relied on China for materials and components. Another finding was that U.S. clean energy manufacturing was trailing the European Union across key dimensions.

The Inflation Reduction Act is in part intended to address these problems. One of the central elements is a series of tax incentives to encourage the purchase of electric vehicles, or EVs. Buyers can claim a $7,500 tax credit for the purchase of a new EV or $4,000 for the purchase of a used one. And the bill encourages the use of clean energy in the U.S. electric grid by revising and extending existing tax credits for investments in and generation of zero-emissions electricity, for instance through solar, wind and geothermal energy technologies.

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What’s new here is that these tax credits are conditioned on where the technologies are sourced and made. For example, to qualify for the full EV tax credit, at least 40 percent of the raw metals and minerals (such as lithium and cobalt) used in the vehicle’s battery will have to be mined and refined in the United States, or in a country with which the United States has a free-trade agreement. The battery, the cells, and the cathodes, anodes and electrolytes contained in the cells will eventually have to be manufactured in North America — or a free-trade partner — to quality for the full credit.

Similarly, the tax credits for zero-emissions electricity provide bonus credits for electricity made with and purchases of wind turbines, solar panels and other clean energy technologies produced domestically. These measures are intended to reduce the U.S. reliance on China, and they mark the largest effort to expand U.S. clean energy manufacturing since the 2009 American Reinvestment and Recovery Act.

Industrial policy may clash with the fight against climate change

One challenge is that these ambitious industrial policy goals may come into conflict with the bill’s climate goals. What happens if domestic supply chains cannot ramp up fast enough, for instance?

Automakers have already begun building electric vehicle assembly plants and battery factories in the United States, but few of the cars manufactured here will initially meet the 40 percent local mining and refining requirements for battery materials. And these target requirements are set to accelerate by 10 percent a year.

It will be difficult to reduce U.S. reliance on China, the research suggests. For example, China processes roughly two-thirds of global lithium, a key material for batteries. Businesses are already finding it hard to buy alternatives to Chinese lithium as global markets get tighter. The bill will make it even harder. Building domestic lithium mines will take years, not months, as mining companies battle to get permissions and overcome local opposition. Furthermore, the increasing demand is only half the battle. Building a domestic supply chain would also probably require additional policies to invest in vocational training for workers and financing for manufacturers.

Americans agree with their state and local officials on climate action

America’s trade partners may be unhappy

Another hitch is that the IRA might spark conflict within the global trading system, which could take years to resolve. The IRA contains protectionist measures that seem likely to violate World Trade Organization rules in ways that have led to frequent trade conflicts in the past.

Here’s an example: The bonus credits for investments in zero-emissions electricity are available only for products manufactured in the United States. They don’t include exemptions for products made in countries with free-trade agreements with the United States.

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Canada and Mexico in particular may reject these provisions and could bring complaints through dispute settlement clauses in the 2020 U.S.-Mexico-Canada Agreement on free trade in North America.

The IRA will have transformative consequences

For all these challenges, the IRA puts economic opportunities rather than economic costs at the center of the climate policy conversation. That may transform America’s economy — and perhaps its politics, too.

The scramble to meet domestic content requirements will lead to a rapid build-out of domestic manufacturing capacity for electric vehicles, batteries, wind turbines, solar panels and the components and materials required to produce them. As states compete for these investments, many new plants will inevitably be constructed in parts of the United States where voters to date have not considered climate change a key priority.

Will we start to see new climate-friendly political coalitions emerge in America? As local economies shift, voters who don’t see climate change as a threat could plausibly join others to embrace the broader economic opportunities created in the transition to clean energy technologies.