Inflation Control Act’s focus on domestic manufacturing could violate WTO rules
The IRA also marks a sea change in climate policy at the federal level. He is trying to combine climate change politics (slowing down global warming) with industrial policy (build manufacturing in USA). If the new provisions work as the drafters of the bill hope, the IRA could have transformative political consequences.
The IRA is trying to keep clean energy manufacturing away from China
In 2021, the Biden administration conducted a comprehensive review of US Supply Chains for Major Clean Energy Technologies. The review found that clean energy industries depended heavily on China for materials and components. Another finding was that clean energy manufacturing in the United States lags behind the European Union in key dimensions.
The Inflation Reduction Act aims in part to address these issues. One of the central elements is a series of tax incentives to encourage the purchase of electric vehicles, or EVs. Buyers can claim a tax credit of $7,500 for the purchase of a new EV or $4,000 for the purchase of a used EV. And the bill encourages the use of clean energy in the U.S. electric grid by revising and extending existing tax credits for investments and the generation of zero-emission electricity, for example through energy technologies. solar, wind and geothermal.
What is new here is that these tax credits are conditional on the origin and manufacture of technologies. For example, to qualify for the full electric vehicle tax credit, at least 40% of the raw metals and minerals (such as lithium and cobalt) used in the vehicle’s battery will need to be mined and refined in the United States. United or in a country. with which the United States has entered into a free trade agreement. The battery, cells, and cathodes, anodes, and electrolytes contained in the cells will eventually need to be made in North America — or at a free trade partner — to get full credit.
Similarly, zero-emission electricity tax credits provide additional credits for electricity generated and purchases of domestically produced wind turbines, solar panels and other clean energy technologies. The moves are aimed at reducing U.S. dependence on China, and they mark the largest effort to expand clean energy manufacturing in the U.S. since the US Reinvestment and Recovery Act of 2009.
Industrial policy can conflict with tackling climate change
One of the challenges is that these ambitious industrial policy goals may conflict with the bill’s climate goals. What if domestic supply chains can’t grow fast enough, for example?
Automakers have already started building electric vehicle assembly plants and battery plants in the United States, but some of the cars made here will initially meet local 40% mining and refining requirements for battery materials. And these target requirements are expected to accelerate by 10% per year.
It will be difficult to reduce America’s dependence on China, research suggests. For example, China deals about two-thirds of the world’s lithium, a key material for batteries. Companies are already struggling to buy Chinese lithium alternatives as global markets tighten. The bill will make things even more difficult. Building national lithium mines will take years, not months, as mining companies struggle to secure permits and overcome local opposition. Plus, growing demand is only half the battle. Building a national supply chain would also likely require additional policies to invest in skills training for workers and funding for manufacturers.
Americans agree with their state and local authorities on climate action
America’s trading partners may be unhappy
Another problem is that the IRA could trigger a conflict within the global trading system, which could take years to resolve. The IRA contains protectionist measures which seem likely to violate World Trade Organization rules in a way that has led to frequent trade disputes in the past.
Here’s an example: Bonus credits for zero-emission electricity investments are only available for products made in the United States. They do not include exemptions for products made in countries with free trade agreements with the United States.
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Canada and Mexico in particular could reject these provisions and file complaints through dispute resolution clauses in the 2020 United States-Mexico-Canada Agreement on free trade in North America.
The IRA will have transformative consequences
For all these challenges, the IRA puts economic opportunities rather than the economic costs at the center of the climate policy conversation. It could transform the US economy – and perhaps its politics as well.
The rush to meet domestic content requirements will lead to a rapid increase in domestic manufacturing capacity for electric vehicles, batteries, wind turbines, solar panels and the components and materials needed to produce them. As states compete for these investments, many new power plants will inevitably be built in areas of the United States where voters have so far not seen climate change as a top priority.
Are we going to start seeing new climate-friendly political coalitions emerge in America? As local economies evolve, voters who don’t see climate change as a threat could likely join others in taking advantage of the broader economic opportunities created in the transition to clean energy technologies.
Jonas Nahm is Assistant Professor of Energy, Resources, and the Environment at the Johns Hopkins School of Advanced International Studies and author of “Collaborative Advantage: Forging Green Industries in the New Global Economy” (Oxford University Press, 2021). Find him on Twitter @jonasnahm.
Joanna Lewis is Associate Professor Emeritus of Energy and Environment at Georgetown University’s School of Foreign Service and author of the forthcoming book “Cooperating for Climate: Learning from International Partnerships in China’s Clean Energy Sector” (MIT Press, 2023). Find her on Twitter @JoannaILewis.