The relentless rise of the IRA

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I am not a fan of anniversary journalism. The passage of time alone is no guarantee there is anything riveting to say about a past event, no matter how singular.

But 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. And there is at least as much to say about it today as there was when it arrived in August.

This is especially the case for those of us outside the US, where entire book chapters are being published on the topic. Here are some briefer thoughts on noteworthy developments, starting with a sentence that scarcely seems credible from where I sit in London: “Globally, the IRA does not worry economic experts.”

That’s the conclusion researchers at Germany’s Ifo Institute think-tank recently reached after surveying experts in more than 130 countries about the effect of the IRA. It sounds highly unlikely when you live in Europe, the epicentre of fears about Washington’s move to finally follow China — and the EU itself — and charge up its clean energy sector with sweeping green subsidies.

But the Ifo found nearly 75 per cent of top economists said the IRA was not a big topic of public debate and most did not expect it to hurt their economies or drive companies towards the US. It was obviously different in Europe, where more than 80 per cent of experts in Germany and France thought the IRA would damage their national economies, and most expected it would spur companies to relocate. Concern was also high in South Korea.

But how well founded are these fears?

It’s too early to know for sure, but we are starting to see some compelling arguments that they are overblown.

I recommend a recent Centre for European Reform paper that shows the EU is performing well ahead of the US in global markets for green goods and by some measures exceeds the performance of even the global green juggernaut that is China.

It’s worth pausing here to note that the International Energy Agency expects China to add nearly 150 gigawatts of solar power capacity alone in 2023, which is more than the EU, the US, India and Brazil combined. But I digress.

The CER paper shows that, when it comes to exports of low carbon technology goods as a share of gross domestic product, several EU countries rank among the world’s best performers, while Germany topped all G7 countries — and China — on this score in 2021.

In a post-pandemic world where there is rising pressure to make supply chains shorter, I think the authors are right to argue that the EU should continue to excel at producing many of the goods at the heart of US and Chinese green industrial policy.

But is there a danger the EU and other wealthy US allies spur a protectionist spiral by scrambling to match the IRA with their own subsidy packages? And could this increase the cost of the green energy transition while harming clean energy investments in developing countries? Unless care is taken, these concerns are real.

On the other hand history has shown that when a rich country (like Germany) subsidises the development of a new green technology (such as solar photovoltaics), emerging markets can benefit. That’s part of the reason China is such a solar colossus today.

Analysts at Boston Consulting Group still think they were right to forecast in December that the IRA will drive down clean tech costs globally by as much as 25 per cent by 2030.

We shall see, but it is already clear the IRA is having a serious political impact abroad. It has delivered an object lesson in climate politics: if you’re serious about bringing in a sweeping climate policy, whatever you do don’t call it a sweeping climate policy.

For a country with such a rich history of legislative acronyms, it is quite something to see a $369bn package of climate and energy measures presented as an “Inflation Reduction Act”. Likewise, the Biden administration’s relentless depiction of the IRA as a job creation machine is being closely watched abroad.

But the speed at which the IRA has shaken conventional wisdom about green industrial policy in capitals across the world has been even more extraordinary to behold, not least in London. If Rishi Sunak has ever harboured any enthusiasm for industrial policy, let alone a green variant of it, he has kept it well hidden. As chancellor, he was blamed for dismantling the industrial strategy drawn up under Theresa May and within months of becoming prime minister, he disbanded the Department for Business, Energy and Industrial Strategy.

Now, as the EU prepares to match the IRA’s incentives and an ascendant UK Labour opposition party promises its own green prosperity plan, Sunak is facing widening criticism that his ideological rigidity is forcing the country to fall behind in a global race to net zero. That pressure is unlikely to fade considering the IRA’s early impact at home. 

Spending on the construction of manufacturing factories has boomed in the US as a result of the IRA and other measures such as the Infrastructure Investment and Jobs Act and the Chips Act, the US Treasury reported last month. The upshot, I think, is that while the IRA might have been made in America, a lot of us in the rest of the world will end up buying it.

Do you agree, Ed? And is the global impact of the IRA leading to any interesting outcomes at all in Washington?

Recommended reading

• I’ve just finished Inside Story, the last novel Martin Amis wrote before his death in May. It’s an autobiographical account of his relationships with the late Saul Bellow, Philip Larkin and Christopher Hitchens, and it’s deeply moving to read knowing Amis would himself die three years after it was published.

• Speaking of memoirs, there has been a mini surge of nostalgia for those not-so distant days before email and smartphones when we had A Life. Dan Kois had a nice take in Slate a few weeks ago and Ian Bogost has just done another in The Atlantic.

• Finally, the FT has just published another sexual misconduct investigation, this time into the celebrated architect, Sir David Adjaye. My colleagues Josh Spero and Anjli Raval spent months reporting this difficult but important story. Meanwhile, Antonia Cundy and Madison Marriage have an update on their investigation into London financier Crispin Odey. Six more women have alleged the hedge fund manager sexually assaulted or harassed them. Odey was ousted from his Odey Asset Management after the FT published the accounts of 13 women who said they had been abused by him.

Edward Luce responds

To be honest Pilita, I’m not yet confident of the long-term impact of the IRA. What I hope will happen is that those subsidies will be treated as a downpayment on more direct federal and state-level action to cut carbon output. If Donald Trump is re-elected next year, however, I have little doubt the legislation will be undone. As you know, House Republicans made the IRA’s reversal a condition of lifting the US debt ceiling last month. They failed to achieve most of their demands partly because of the tiny size of their majority. But the party’s stance on green energy is clear. Republicans are the carbon party. Democrats, for the most part, are the post-carbon party. That split is getting more doctrinaire as time goes on so we can take nothing for granted. 

The IRA’s passage was dramatic because it broke US precedent on green energy, as well as demonstrating that Joe Biden could get bills passed. But I don’t think we should overstate its scale. Depending on take-up, the law provides subsidies of $30bn to $50bn a year over the next decade to accelerate America’s post-carbon reality. It is infinitely better than nothing but it is not enough on its own for the US to meet its carbon reduction pledges. As you infer, the law’s greater significance could be in the trade and subsidy actions it stimulates across the Atlantic and elsewhere.

In answer to your question, the IRA’s global impact occupies almost no mindshare in Washington. If the EU comes up with matching subsidies, well-targeted or otherwise, I doubt it would bother the Biden administration. A few years ago, the EU might have taken the US to the World Trade Organization over such a law. Today that body is toothless. Because trade scepticism is now bipartisan in the US, the demise of rules-based international trade is one continuity on which the rest of the world can count. 

I don’t want to sound like an Eeyore. I think the IRA was very good news. Biden won an important battle. But he, and his party, are going to have to keep fighting the same battle for a long time to come.