The IRA Has A Greater Focus Than Just Tackling Climate Change

The EU debate also misses out on some of the security and political drivers behind the IRA. The IRA is the latest in a series of huge spending and investment commitments by the Biden administration. It follows the July 2022 CHIPS and Science Act (worth $39 billion) and the 2021 Bipartisan Infrastructure Deal (worth $1.2 trillion). Clearly, President Biden is hoping that these will not only lead to more jobs, investment and wealth but that they will reduce US dependence on “foreign entities of concern” in critical sectors.

A climate imperative

There are several motivations behind the IRA, the first being responding to climate change. For years, the US has been criticized for doing too little to address it. Under President Biden, the US has not only rejoined the Paris Agreement but also passed the Bipartisan Infrastructure Deal which allocates federal money to infrastructure projects that focus on climate change mitigation and resilience.

The IRA is the administration’s latest attempt to green the world’s largest economy. Congress has directed nearly $370 billion (roughly €350 billion) worth of tax breaks and subsidies into US green energy production and manufacturing, in particular for electric vehicles, solar panels and batteries that are produced in North America. It also provides $40 billion in tax credits (roughly €37 billion) to promote carbon capture, clean hydrogen and investment in clean energy technologies - and unlike the EU subsidies, these are largely uncapped.

While IRA assistance only amounts to around 0.5% of US GDP, it’s the most generous assistance awarded by any world economy, bar China. And unlike EU state aid, most of these subsidies can be used for manufacturing needs as well as R&D. The strategy seems to be working: according to the US Clean Power Association, there are at least 20 new or expanded green manufacturing plants in the US, of which 50% are foreign. South Korea’s Hanwha Q-Cells, for instance, announced a $2.5bn solar factory expansion in Georgia in January. Volkswagen is also said to have put on hold a planned battery plant in Eastern Europe to expand production in the US instead.

While EU governments support the US’ climate ambitions, they fundamentally disagree with how the US is going about it. Today, more than a quarter of the world's electric vehicle production is European and the US has traditionally been an important market for European EVs. For the EU (but also many other allies of the US), the rigid local component requirements found in IRC Section 45W of the IRA are seen as a protectionist move designed to boost US green tech companies at the expense of European ones. It also confirms that the US, like China, is placing national preference at the heart of its industrial policy.

Biden has said that the US and the EU would begin negotiating a critical minerals agreement which, if adopted, would make minerals extracted or processed in the EU eligible for IRA clean vehicle tax credits.

Supply chain dilemmas

A second rationale behind the Inflation Reduction Act is to lessen US reliance on China and other states for critical raw materials that are used in clean technologies. Since 2010, China has consistently outspent the US on clean energy. Today it is the largest commercial beneficiary of the clean energy transition thanks to its centrality in clean energy technology supply chains. On top of solar and wind, it is now the undisputed leader in electric vehicles.

This poses two challenges to the US. First, there is a growing bipartisan view that China’s vast assistance to Chinese clean tech is skewing global competition. For many in Washington, the only way to compete is to provide incentives for US production. Second, while trade between the US and China has grown over the past year, there are concerns that the US is too dependent on China for the supply of critical raw materials. China is the dominant player in global mineral processing that is essential to its climate transition (68% of nickel, 40% of copper, 59% of lithium, and 73% of cobalt are refined in China). On top of that, it is a strategic player in later stages of the supply chain, for manufacturing battery cell components for example. The EU’s clean energy supply chains, for their part, are also heavily dependent on China’s rare earths and lithium.

To respond to these challenges, the US wants to stimulate the development of domestic critical minerals supply chains and link these with “countries whose values it shares”, like the EU. Interestingly, the IRA has already led some US-based companies to readjust their supply chains. Others, like US miner Albermarle, the world’s largest lithium producer, have raised earnings guidance and sales targets. The European Commission is also hoping to introduce targets for local production for 2030. These would not be as strict as in the US but they would encourage EU companies to consider the security of supply in call for tenders. The EU’s Net Zero Industry Act, published today, still needs to be discussed in the Council, the grouping of the 27 member states, and in the European Parliament.

The Biden Administration knows this and has various strategies to meet demand. In April 2022, it invoked the Defense Production Act to fund the mining, processing and recycling of critical materials in the US. Later in June, the administration announced the Minerals Security Partnership (MSP) – dubbed “a metallic NATO” – to bolster critical mineral supply chains. MSP partners include Australia, Canada, Finland, France, Germany, Japan, the Republic of Korea, Sweden, the UK, the US, and the EU, represented by the European Commission. Both reflect a new strategic emphasis on friend-shoring and reducing dependence on China in strategic sectors.

A political imperative

A third rationale behind the IRA is to bolster America’s industrial strength, with a focus on job and wealth creation at home. President Biden was elected on the promise to “build back better,” and more recently, he committed to “create 1 million auto industry jobs”. Clearly, he needs to show Americans that he can overhaul the economy without losing jobs - especially if he is planning to run for re-election next year.

The IRA is no exception. It follows up on Biden’s campaign promise to deliver for working families and grow US competitiveness, which many see as being lost to globalization. On a recent trip to the TSMC semiconductor plant in Phoenix, Arizona, President Biden added that soon “America will be shipping products overseas – not jobs”.

The IRA also responds to domestic pressures to reduce inflation, which was as high as 8.3% in August when the bill passed. The bill aims to reduce budget deficits while providing social safety benefits. On health care provisions, for instance, it expands Affordable Care Act subsidies by 3 more years through a $64 billion investment. The $35 cap on insulin is expected to translate into big savings for senior citizens. It also sets aside $250 million for agricultural research, namely in a bid to reduce CO₂ emissions. The IRA is a key component of Biden’s domestic agenda, which he referred to as “one of the most significant laws in our nation’s history”.

The IRA is a complex bill. When the final text passed in August 2022 (extremely narrowly, with a 220-to-207 party vote line in the House and a 51-50 one in the Senate) it was thanks to intense negotiations between Senator Joe Manchin (Democrat) and Senate Majority Leader Chuck Schumer (Democrat). This partly explains why the US did not consult its allies about the IRA – but also why it is complicated for the US administration to change it, even if it wanted to.

Moving past the transatlantic friction

For all its challenges, the IRA puts clean tech opportunities at the center of the climate policy conversation. Time will tell whether the IRA was really about climate change or whether, as some critics have claimed, it was about making the US economy stronger in one of the sectors it was lagging behind in.

Next year, both sides of the Atlantic will hold important elections (EU parliamentary elections on one side, US presidential ones on the other). The Biden administration is unlikely to tear down a policy that is so central to its campaign promises. Rather than wait on the US, the EU must take more steps to strengthen its clean tech industry by providing faster and more generous support, simpler and more transparent government procurement rules, and more investment in skills and the supply of critical raw materials.

Copyright Image: Mandel NGAN / AFP

US President Joe Biden meets with European Commission President Ursula von der Leyen in the Oval Office of the White House in Washington, DC, on March 10, 2023.