The Geopolitics of the Inflation Reduction Act

How the US is planning to reshape global supply chains and develop its clean energy sector

Last year amid much last-minute Congressional deal making the misleadingly named Inflation Reduction Act (IRA) was finally passed in the United States. For many years the US remained a climate policy laggard thanks to science denying Congressional Republicans. As a result, the United States had fallen behind China just as the clean energy sector began to take off.

China’s dominance extended not just to the production of clean energy technologies, but also the supply chain that feed the electric batteries, solar panels and many other technologies critical to global energy transition. A global spider’s web of connections that provide the critical materials like lithium, copper and cobalt which feed the clean tech industry are dominated by Chinese manufacturers.

Critical Supply Chains

The US recognised the urgent need to reduce greenhouse gas emissions and the risk of continued Chinese dominance of critical supply chains which power green technology. The passing of the IRA could be the turning point that will make the United States a manufacturing and innovation leader for the global energy transition.

Can the US become a Climate Leader?

The consequences of the legislation are still unfolding but it seems certain it will be the most important policy shift in a generation making the US a centre for renewable and net-zero technologies that others will emulate and compete with. The IRA will also have profound geopolitical impacts, shaping the global technology and energy map.

The IRA is a complex lengthy piece of legislation, but one element is the use of tax credits will benefit domestic clean energy manufacturers who can show they are using domestically mined critical raw materials, or with countries that have free trade agreement with the US. In addition, there are penalties for using materials from unfriendly countries.

The purpose is to reduce US dependence on China and develop the domestic climate tech industry. The US will attract new green tech investment in solar power and electric batteries, or more speculative ones such as hydrogen and carbon capture. If successful, the IRA will also reshape global supply chains away from China to the US and its allies.

Clean Energy Arms Race

In climate terms the IRA will accelerate investment in green energy and reduce emissions – helping the US meet its Paris Alignment goals. For example, in the eight months since passing USD 150 billion in new investment in utility scale clean energy has been announced across the US.

The IRA still faces a number of risks, activist courts or a return to Republican dominance in Washington may derail the legislation at a later stage. But even Republican’s will likely realise that they need to compete with China in these emerging sectors, plus many of the benefiting companies are in Republican districts.

Competitors or Allies?

Allies across the Atlantic have complained about the IRA, some in the EU saying it distorts the global playing field and threatens its domestic clean energy industry. This is despite criticism of the US failing to live up to its climate commitments in the past. Many European companies have announced they are expanding operations of clean energy facilities in the US. Volkswagen, BMW and Enel are among the companies who have said they are investing more in clean energy thanks to the tax credits.

Some of this can be sourced to lobby groups who are shopping for the best subsidies. Playing the EU and US off each other to cut the best deal for their client. While it may cause some short term pain, this cross-Atlantic competition should benefit clean energy sector as the EU, US and China, plus many others compete over and nurture a fast growing sector.

The EU Response

The IRA has already forced the EU to consider beefing up its response. The European Green Deal Industrial Plan announced in February 2023 which looks to invest more in green technology. However, these plans are not yet agreed with different EU members unable to yet agree the priorities and some are arguing that the IRA does not pose such a big threat.

But both the EU proposed Net-Zero Act and Critical Raw Materials Act and US IRA stress the importance of resilient supply chains. This seemingly dull topic could put them on a collision course with China.

China in Pole Position

The EU and US legislation are both looking to diversify their supply of critical materials. These moves underline the fact that the world has woken up to the risks of around the supply chains that are powering the global transition to net-zero. By encouraging a shift to friendly countries, the EU/US hope to crack China’s domination of the sector.

But China’s trade in the likes of lithium, nickel, cobalt, copper and rare earth metals goes deep. It has made strong connections with the emerging economies where much of these riches lie. China has a strong incentive to retain leadership of the sector, it wants to remain the industrial powerhouse that provides the world with wind turbines, solar panels, electric batteries and other emerging climate tech.

Refining Problems

One problem is that the refining of many of these metals can be a messy business. It might be difficult to locate these industries in developed economies with strong environmental protections. China’s battery, solar and clean energy technology sector is well established, protected and encouraged by the government. China also benefits from lower production, (albeit rising) costs compared to the west. Shifting supply chains and manufacturing from China might be harder than some think.

US and EU insistence on “friend-shoring” may push manufacturing costs higher, as firms try and use more expensive domestic or friendly producers. The next few years will the crucial in determining if the EU and US can wrest control of climate tech supply chains and manufacturing away from Beijing.

All this comes at a time when tensions between the US and China are rising. Control over the clean energy sector is just one element of this geopolitical rivalry which encompasses Taiwan, trade and ultimately China’s desire to reshape the global order.

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