• The US Inflation Reduction Act – Six Months On

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      Patrick Lavery

      Combustion Industry News Editor

Six months on from the passing of the landmark Inflation Reduction Act (IRA) in the USA, its effects domestically and internationally are becoming more visible, as a range of recent reports illustrate. Climate Power, an advocacy group “focused on building the political will and public support for bold climate action”, has reported that between 16 August 2022 and 31 January this year, over 90 new clean energy projects have been announced across 31 US states, estimating that it will generate around 100,000 new jobs from US$89.5 billion of investment.

The projects are broadly categorised into solar, wind, hydrogen, battery, electric vehicle and ‘clean tech’. While some projects may have proceeded without the IRA, the influence of the Act as an accelerator are undeniable. Credit Suisse estimates that federal spending/tax subsidies as a result of the Act may end up totalling US$800 billion (US$370 billion in subsidies, grants and loans, which are capped, and a further US$430 billion in tax credits, which are uncapped). When private spending is included, a total of US$1.7 trillion of investment will occur.

An extended report from the Financial Times (along with other reporting) has highlighted various ways in which the Act is stimulating economic activity. This includes shipbuilders receiving orders for hybrid ferries and crew transfer vessels (for offshore wind work), Vietnamese carmaker VinFast setting up a battery making plant in North Carolina, and various renewables, hydrogen, nuclear and carbon capture projects.

By 2031, it is expected that renewables capacity will have reached slightly under 120 GW, tripling the 2022 capacity of around 36 GW. Incentives for carbon capture, hydrogen and bioenergy are also expected to lead to a surge in projects, and apart from engineers, technicians, construction and transport workers, there is also a rush to obtain the services of lawyers, consultants and brokers, especially now that there is the ability to trade green tax credits on the open market.

Internationally, the IRA has created concern that is somewhat tinged by irony. Politicians from the European Union, so long the champion of climate action, have criticised the Act for its extensiveness, as European businesses are being tempted to shift investment to the USA with the lure of less risk and higher returns, part of this also being cheaper energy. An instance of the economics behind a battery plant demonstrates this – federal money could cover up to 50% of headline costs, provided fair wage, domestic sourcing of components, and location near fossil fuel-producing community conditions are met. For green hydrogen projects, too, subsidies and tax credits are expected to reduce private project costs by around half, totally changing the international investment landscape. European Commission President Ursula von der Leyen has claimed the IRA produces “unfair competition” and “closes markets”, while French President Emmanuel Macron has warned the Act could “fragment the west”.

There are similar concerns in Australia, where the CEO of the country’s Clean Energy Council has said that Australia risks losing the race to decarbonise in the wake of the IRA. His call for increased policy efforts to at least somewhat match US incentives is sure to be repeated across many economies, including European ones, though Canada and Mexico are somewhat different cases. As the IRA gives all North American countries incentives for electric vehicle production, Canadian businesses are being urged by the federal government to tap into the opportunity, although it is acknowledged that in other areas, such as low-carbon hydrogen and biogas production, as well as for carbon capture and storage, Canadian firms do not enjoy the same incentives as their US rivals. Canadian Prime Minister Justin Trudeau is attempting to pass a ‘Just Transition’ bill which aims to clean up Canada’s oil industry while also providing incentives for cleaner technologies and fuels, which may seek to balance those in the USA.

While other countries may be looking to level the playing field, if the USA has a year or more of a head start on aggressive policy, such momentum may be difficult to surmount. Officials from a number of US states are already reported to be attempting to lure European businesses to their states. Ohioan officials, for instance, met with businesses in Belgium, Germany and Italy over the past four months, and representatives from Michigan, Georgia, Illinois, and West Virginia all attended the Davos World Economic Forum in January to pitch to businesses. If European policy incentives are slow to catch up, such businesses may already have moved.

While the IRA is powerful, it is unlikely to be all-conquering. China’s pre-existing advantage in several industries shall be difficult for the US to overcome, as China already produces two-thirds of the world’s batteries for electric vehicles and three-quarters of solar modules. In 2022, BloombergNEF estimates, the country invested US$546 billion in its energy transition, and has a natural advantage in being the source of many rare-earth elements needed in the energy transition. Analysts Wood Mackenzie estimate that the IRA will only increase the US’s market share in lithium battery production by 3% by 2030 (to 13% from the 10% estimate without the IRA).

Moreover, permitting processes in the US are more fraught, making actual roll-out more difficult, perhaps, than in China. Several analysts have pointed out that it is impossible for the US to be wholly insular in the energy transition, with raw materials and sub-components needing to be sourced across the world, but the IRA nevertheless seems set to loom large in the energy transition, with particular friction created with Europe. Globally, nevertheless, the investment from the Act seems set to boost deployment of clean technologies, which will ultimately lower prices and lead to further roll-outs, particularly in countries with less money to spend.