In August 2022, US President Joe Biden signed the Inflation Reduction Act (IRA), which promises massive investment by the US government in US-built green infrastructure and industry. The IRA will provide $400bn-$1trn over the next decade in tax incentives, grants, and loans, most of which will be directed to green investment in sectors like energy, transportation, and manufacturing to support US industry.
However, while the IRA’s goals are domestic, its impact has been felt far beyond US borders. One of the Act’s features is its explicit shift toward protectionism. It extensively favors US industry in a way that has provoked mass outrage from foreign governments, including close allies; an Indian government official called it “the most protectionist act ever drafted in the world,” and a South Korean official called it a “betrayal.”
Biden seems to be joining Trump in turning America inward, at least economically, and undermining the open trade regime. The IRA’s initiatives mark a major shift towards a protectionist industrial policy for renewable energy and climate change mitigation.
The Inflation Reduction Act and the Rise of Green Protectionism
The Inflation Reduction Act primarily employs a strategy of subsidies, utilizing tax credits predominantly funded by non-environmental tax increases. Tax credits for green energy or carbon capture technology, while carbon taxes impose penalties on emissions. Both measures alter the cost dynamics of various activities based on their carbon footprint.
Upon signing the Act into law, President Biden implemented measures that placed numerous foreign companies at a competitive disadvantage unless they relocated their production operations to the United States because of the renewable energy tax credits for American-produced goods. The EV tax credit has gained more attention. It aims to incentivize electric vehicle adoption, but also includes a protectionist element; vehicles must undergo final assembly in North America, with additional clauses regarding battery mineral sourcing and North American content. It also restricts sourcing minerals used in batteries from China and other foreign entities of concern, and mandates batteries to contain at least 50 percent North American content in 2024, increasing to 100 percent by 2028. These stipulations aim to bolster investment in the American clean energy supply chain while reducing dependence on Chinese and Russian rare earth elements crucial for green technology production.
The push to restore the renewable supply chain has gained traction in a more assertive Congress. A bipartisan group of lawmakers pushed to reintroduce tariffs, reaching up to 254%, on four Southeast Asian nations, targeting Chinese manufacturers evading tariffs by relocating to Cambodia, Malaysia, Thailand, and Vietnam, which collectively supply 80% of US solar imports.
In a letter addressed to congressional leadership, 230 economists, including notable figures such as Vernon Smith and Robert Heller, expressed concerns that the bill would increase consumer prices and inflation. The Tax Foundation, known for its fiscal conservatism, echoed these worries, suggesting that the Act might exacerbate inflation by constraining economic productivity. Their analysis estimated potential job losses of 29,000 full-time equivalent positions and a 0.2% reduction in GDP.
Internationally, there’s apprehension as the law appears to favor American industry. In the European Union, 27 finance ministers have expressed “serious concerns”. They argue that at least nine aspects of the Act violate World Trade Organization rules. Particularly contentious are the subsidies aimed at encouraging consumers to purchase North American-assembled electric cars, which European officials view as discriminatory against European car manufacturers, as the EU lacks a free trade agreement with the U.S., preventing American consumers from applying the $7,500 credit to European-made cars unless they meet specific sourcing requirements. In response, the European Union has introduced its own set of green industrial laws through its Net Zero Industrial Act, which mirrors many of the incentives and subsidies of the IRA. This sentiment has prompted other countries, such as South Korea, Japan, and Australia, to consider enacting similar legislation.
A joint report by the WTO, OECD, IMF, and World Bank warned about the dangers of the rise of climate subsidies. At a time when global cooperation is imperative to confront a pressing global emergency, the demise of multilateralism looms large. The continued picking of winners and losers could slow the global energy transition. As a recent paper from the European Central Bank (ECB) points out, the Act’s provisions will attract businesses to the U.S. but weaken customer bases in foreign economies, impacting economies of scale.
These policies are not economically efficient. Domestic favoritism, like trade wars, isn’t just problematic; it wastes resources and deprives consumers of cheaper options. For instance, if consumers pay more for electric vehicles (EVs), they have less to spend on other items, hurting various businesses. Even if tax credits offset EV costs, they’re funded by increased taxes, hitting the impoverished hardest.
In conclusion, green protectionism hampers climate objectives by reducing returns, raising energy costs, and failing to deliver on decarbonization pledges. These policies exacerbate poverty in poorer countries and hinder climate efforts. Policymakers in the developed world must shift away from protectionist measures and subsidies and opt for policies encouraging economic and trade freedom. By fostering an environment conducive to trade openness, streamlining cumbersome regulations and advocating tax policies that stimulate growth, markets can more effectively cater to consumer preferences for cleaner technologies, all while ensuring that developing nations are not left disadvantaged in the process.
Photo by Abby Anaday
