IRA Green Carrots
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IRA Green Carrots

The following is an excellent review of the green energy impact of the Infrastructure Reduction Act (IRA) from an Economist magazine email:

“We have provided a suite of carrots to make the United States irresistible.” So declares Jennifer Granholm, America’s energy secretary, in describing three big recent laws that have transformed America from a climate laggard into the global hotspot for new clean-energy investments. The Infrastructure Reduction Act (IRA), which passed last August on the heels of the passage of the Bipartisan Infrastructure Law and the CHIPS Act, shovels up to $800bn in taxpayer money to climate-related infrastructure through tax credits, subsidies, loans and grants. Some $200bn in investment has flowed into manufacturing of batteries, electric cars, hydrogen fuel and other clean kit in the past two years, with some $65bn of that coming since the passage of the IRA.

This is promising, but my recent report argues that three things still stand in the way of America realising its potential as a clean-energy superpower. The report ran alongside an in-depth exploration of how electricity grids stand on the verge of transformation, and what the challenges to that transformation are.

The most obvious obstacle is the fact that America suffers from the BANANA syndrome: Build Absolutely Nothing Anywhere Near Anybody. A huge amount of infrastructure needs to get built if a radical decarbonisation of the economy is to take place over the next decade, but even existing projects to install clean energy and upgrade transmission lines are backlogged for years. Congress must act soon to break this logjam. This is unlikely given that a presidential election cycle is upon us, but even so there are some hopeful signs of bipartisan compromise on the matter. 

The second big worry is that America-first provisions written into the three laws, which enjoy bipartisan support in part because they are designed to thwart the perceived threat from China, will bog down decarbonisation. Protectionist measures, if applied with rigour by bureaucrats, could well make it more costly to build clean energy and lead to slower climate progress. This remains a risk, but there are early signs of pragmatism in how the Biden administration is implementing such rules on matters like labour standards and “environmental justice”. A recent bureaucratic ruling on EV supply chains, for example, was written in a broad manner so that sourcing from American allies would be eligible for subsidies. But a tilt towards protectionism remains a risk.

Finally, because American politics will not allow for the ideal policy solution of an economy-wide, refundable federal carbon tax, the IRA plumps instead for showering money on every type of decarbonisation technology imaginable—an approach Senator Joe Manchin, an influential Democrat with fossil-fuel interests, calls an “all of the above” strategy. The problem with this all-carrots strategy is that it is hugely wasteful, as compared to the use of carbon pricing, and also insufficient to achieve climate ambitions. Fresh analysis from the Rhodium Group, a research outfit, shows that the IRA alone, while helpful, cannot achieve Mr Biden’s goals for 2030.

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