The partisan US climate law is politically divisive and will likely face future challenges which could limit its potential economic, energy transition, and environmental benefits.
Passed one year ago without the help of a single opposition Republican vote in Congress, the Inflation Reduction Act (IRA) is noteworthy in that it seeks to address a major national challenge on a party-line basis.
Even then, it embodies green energy and industrial policy as envisioned by progressive Democrats who include President Joe Biden, senior administration officials, and lawmakers that control party power positions in Congress.
Yet, left-wing Democrats comprise less than half of their own party membership nationwide and progressives of all political stripes comprise under 29% of voting age Americans.
That truth reduces the political margin for error should the law not be the sweeping game-changer Biden forecasts for domestic clean energy supply chains, electric vehicle production, emissions reduction, environmental justice, high electricity bills, job creation, new technology advancement, and in other areas.
The US track record is mixed with targeted industrial policy support. The high-profile automotive and steel sectors, for example, are much smaller today and employ a fraction of what they once did. They are somewhat more competitive. In contrast, textiles and apparel largely went overseas.
Historically, the US has done much better achieving supreme objectives in the national interest with a broad political consensus than without.
Examples include development of nuclear reactors for electricity generation, the 48,600- mile ((78,535 km) interstate highway system at a cost of $560bn, a nuclear-powered navy, sending men to the moon and World War II mobilisation.
The 1970 National Environmental Policy Act (NEPA), the nation’s cornerstone environmental law viewed as inviolable by most progressives, passed the House of Representatives by a 372-15 margin, won unanimous support in the Senate, and was signed by a Republican president Richard Nixon.
Political divisions played a key role in the failed wars in Afghanistan against the Taliban and in Vietnam.
The first serious political test could come after November 2024 elections – if Republicans win control of Congress and/or the White House.
Early polls show former President Donald Trump, the presumptive Republican candidate and no friend of clean energy, running even with successor Joe Biden. That Trump is within potential striking distance of a second term despite four criminal indictments is evidence of how unpopular Biden is with most Americans.
Clean energy lobby groups believe as pieces of the legislation find their way into the economy, they will become resilient and difficult to roll back regardless of who is in the White House. Maybe...
What's the cost?
Other factors could limit full IRA impacts. One is cost. The Biden administration estimates the law provides $369 bn in funding for federal climate-related spending and clean energy tax credits.
Goldman Sachs, a leading Wall Street voice for US action on climate change, estimates a $1.2trn price tag, while Wood Mackenzie estimates that double that amount is possible. There is no cap on use of tax credits by eligible projects that promote clean energy consumption and generation capacity expansion. Then add in $400bn in low-cost government loans.
While the Department of Treasury has not issued guidance for all IRA provisions, more lenient interpretations of eligibility requirements could further increase the use of tax credits and level of federal subsidies.
Higher than advertised IRA-related spending will matter as the federal government racks up deficits.
Higher than advertised IRA-related spending will matter as the federal government continues to rack up deficits that are unsustainable regardless of whether Democrats or Republicans are in power. Net interest on the debt so far this year is up one-third to a staggering $572bn and now stands at 15.5% of all federal revenue.
On 1 August, Fitch Ratings stripped the US of its top-tier sovereign credit rating for only the second time ever, citing “the expected fiscal deterioration over the next three years” and a “high and growing general government debt burden,” and acrimonious standoffs in Congress over borrowing.
While the White House strongly disagreed with the move and blamed Republicans for “undermining governance and democracy,” belt-tightening is inevitable down the road.
The unprecedented level of subsidies will also disproportionately benefit a relatively small number of favoured players in the $23trn US economy.
For example, First Solar, the only US panel maker at scale, expects to receive as much as $710m in subsidies in 2023, almost 90% of forecast operating profit, according to The Wall Street Journal. It reported one analyst estimating the incentives could be worth more than $10bn for the company over the next decade.
Giving so much largesse to so few, which is a longstanding criticism of fossil fuel subsidies by progressives, is certain to subject the IRA to increased political pressures going forward. Even more with many recipients expected to be foreign companies, who are unveiling tens of billions of dollars in manufacturing supply chain investments.
It also underscores the paramount role the federal government and politicians will play, as opposed to market forces, in determining the future direction of key US sectors such as automotive, electric power generation and delivery, and mining.
Ultimately, at issue is Biden’s green industrial policy – a mix of tax breaks, other subsidies such as loan guarantees, public investments in targeted technologies, R&D support, and trade protections – and whether this is the best approach to accelerate decarbonisation.